FASB Issues Standard on Induced Conversions of Convertible Debt Instruments

The Financial Accounting Standards Board (FASB) has published an Accounting Standards Update (ASU) that improves the relevance and consistency in application of the induced conversion guidance in FASB Accounting Standards Codification Subtopic 470-20, Debt—Debt with Conversion and Other Options.

Current generally accepted accounting principles (GAAP) provides guidance for determining whether a settlement of convertible instruments at terms different from the original conversion terms should be accounted for as an induced conversion (as opposed to a debt extinguishment). Because that guidance was written in the context of share-settled convertible debt instruments, stakeholders raised questions about how to apply the existing induced conversion guidance to settlements of convertible debt instruments with cash conversion and other features that have become prevalent in the marketplace.

The amendments in the ASU clarify requirements for determining whether certain settlements of convertible debt instruments, including convertible debt instruments with cash conversion features or convertible debt instruments that are not currently convertible, should be accounted for as an induced conversion.