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FASB Proposes Clarifications to Accounting for Certain Modifications of Forwards and Options

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Soyoung Ho

The FASB on October 26, 2020, issued a narrow proposal aimed at clarifying and reducing diversity in accounting for certain modifications or exchanges of freestanding equity-classified forwards and options, including warrants.

The proposal “would provide guidance on how an issuer would measure and recognize the effect of these transactions,” the FASB said. “Specifically, it would provide a principles-based framework to determine whether an issuer would recognize the modification or exchange as an adjustment to equity or an expense.”

Comments are due by December 28 on Proposed Accounting Standards Update (ASU) No. 2020-800Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Forwards and Options a consensus of the Emerging Issues Task Force.

The accounting standard-setter issued the exposure draft following a September 3 decision by its Emerging Issues Task Force (EITF) to clarify the accounting. In mid-September, the FASB ratified the EITF consensus on the issue and decided to issue the exposure draft. (See FASB to Propose Task Force’s Decisions Related to Warrant Modifications in the September 17, 2020, edition of Accounting & Compliance Alert.)

In particular, the proposal responds to concerns that there has been a diversity in practice when companies account for economically similar modifications or exchanges of freestanding equity-classified forwards and options because there is no explicit guidance in the FASB’s Accounting Standards Codification (ASC) today, according to ASU No. 2020-800.

“Stakeholders have requested that the Board provide guidance that would clarify whether an issuer would account for a modification or an exchange of a freestanding equity-classified forward or option that remains equity classified after modification or exchange as (1) an adjustment to equity and, if so, the related earnings per share (EPS) effects, if any, or (2) an expense and, if so, the manner and pattern of recognition,” the exposure draft states.

The FASB said the proposed amendments would not apply to modifications or exchanges of financial instruments that are within the scope of Topic 718, Compensation—Stock Compensation, or accounted for as derivatives under Topic 815, Derivatives and Hedging.

“That is, accounting for those instruments would continue to be subject to the requirements in Topic 718 or Topic 815,” the exposure draft notes.

The proposal does not affect a holder’s accounting for freestanding equity-classified forwards and options.

The effective date will be determined after the EITF evaluates comments. But early adoption would be allowed.

The EITF fields questions about applying narrow areas of U.S. GAAP and determines whether the questions should be addressed by amending an accounting standard. FASB members have the final say on whether an issue requires a formal change to the existing accounting literature.


This article originally appeared in the October 27, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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