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FASB

Companies Getting Simpler Rules for Determining Liabilities From Equity

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

The FASB will issue a proposal in August to make targeted changes on the accounting for distinguishing liabilities from equity, and to simplify the rules for convertible debt–complex areas in GAAP that cause frequent financial restatements. The FASB on June 19 voted 5 to 2 to issue the proposal for a 75-day comment period. The changes would reduce reporting cost especially for small public and private companies.

The FASB will issue a proposal in August to make targeted changes on the accounting for distinguishing liabilities from equity, and to simplify the rules for convertible debt—complex areas in GAAP that cause frequent financial restatements.

The FASB on June 19, 2019, voted 5 to 2 to issue the proposal for a 75-day comment period.

The changes are aimed at reducing cost and complexity, especially for small public and private companies, in one of the more contentious portions of GAAP.

“With respect to convertible debt, the proposal would improve understandability,” FASB Vice Chairman James Kroeker said during the meeting. It also “reduces the complexity of GAAP tremendously particularly in an area where it is most warranted, which is private and small public companies,” he said.

The board plans to propose – among other changes – reducing the number of models for convertible instruments with a goal of making it easier for accountants to interpret and apply the rules.

The change would provide relevant information for financial statement users so that they can understand the reporting of convertible instruments in a more consistent manner across companies, according to board discussions.

Companies would be required to disclose the fair value of convertible instruments individually at the whole instrument level, which would increase transparency of the information about the convertible instrument.

The FASB’s decision followed discussions on five “sweep issues”—narrow discrepancies flagged by external reviews of its tentative decisions.

Two board members, Christine Botosan and Harold Schroeder said they would write dissents to the proposal because though they support changes related to convertible debt, they disagreed with those related to the classification of contracts in an entity’s own equity.

“We’ve heard over and over from stakeholders that the guidance that is employed to distinguish liabilities from equities is complex, that it lacks organization, that it’s internally inconsistent, that it’s overly rules based, that it results in form over substance conclusions and I’m concerned that the changes we are making are not adequately addressing any of those concerns that have been expressed,” Botosan said.

For example, the board is adding a requirement to assess remoteness as part of the flowchart that entities have to follow in order to determine the classification, said Botosan.

“I don’t believe that adding a judgment-based step to what is already a complicated set of steps is going to reduce complexity, instead I feel it’s also going to add to the complexity,” she said.

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