The FASB has published an Exposure Draft related to Debt—Debt with Conversion and Other Options (Subtopic 470-20) - Induced Conversions of Convertible Debt Instruments. The objective is to improve the application and relevance of induced conversion guidance and provide clarity on whether settlements should be treated as induced conversions or debt extinguishments.

While existing guidance applies only to conversions involving the issuance of all equity securities specified in the original debt terms, the Exposure Draft seeks to address issues causing divergence within GAAP by clarifying criteria for settlements involving convertible debt instruments that do not necessitate the issuance of equity securities upon conversion. Additionally, the Exposure Draft provides guidance on the incorporation, elimination, or modification of a volume-weighted average price (VWAP) formula in these settlements. Entities would be required to assess whether the form and amount of conversion consideration are maintained using the fair value of an entity's shares at the offer acceptance date.

Entities can choose to apply the Exposure Draft, if issued, prospectively or retrospectively. The effective date and the possibility of early application have not yet been determined. The FASB is seeking stakeholder feedback on whether the proposed changes are appropriate and provide decision-useful information along with input on effective date and transition provisions through March 28, 2024.

The full text of the Exposure Draft can be found here.

Published: 02/01/2024

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