The amendment includes convertible debt instruments with cash conversion features. Credit: Wasan Tita/Shutterstock.

The Financial Accounting Standards Board (FASB) has released an Accounting Standards Update (ASU) aimed at enhancing the guidance on induced conversion of settlements of convertible debt instruments. 

This specifically involves the FASB Accounting Standards Codification Subtopic 470-20, Debt—Debt with Conversion and Other Options.  

Under current generally accepted accounting principles (GAAP), guidance is provided on how to determine whether a settlement of convertible instruments, with terms different from the original conversion terms, should be treated as an induced conversion instead of a debt extinguishment.  

However, stakeholders have raised questions about applying this guidance to convertible debt instruments with cash conversion and other features. 

The amendments in the ASU clarify how to determine whether certain settlements of convertible debt instruments should be accounted for as an induced conversion.  

This includes convertible debt instruments with cash conversion features or those that are not currently convertible.  

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The update affects entities that settle convertible debt instruments where conversion privileges were changed to induce conversion. 

The amendments in the ASU will take effect for annual reporting periods after 15 December 2025, as well as interim reporting periods within those annual periods.  

This update allows entities to apply the new guidance either prospectively or retrospectively.  

With the prospective transition approach, entities are required to apply the amendments to any settlements of convertible debt instruments occurring after the effective date. 

The update further states that: “Under the retrospective transition approach, an entity should recast prior periods and recognise a cumulative-effect adjustment to equity as of the later of the following dates: (1) the beginning of the earliest period presented and (2) the date the entity adopted the amendments in Update 2020–06. That is, an entity is not permitted to apply the amendments in this Update retrospectively to settlements that occurred before the adoption of the amendments in Update 2020–06.” 

Additionally, earlier this month, the FASB released an ASU introducing authoritative guidance on accounting for government grants received by business entities.