Dive Brief:

• The Financial Accounting Standards Board published new rules Tuesday that will affect how companies account for certain convertible debt, a kind of hybrid security companies issue as debt or bonds, which investors can later exchange for equity if the business grows and the stock value goes up. 
• The publication of the accounting standards update will “improve the relevance and consistency in application of the induced conversion guidance” that underpin generally accepted accounting principles, according to the FASB release. The standard is formally known as Subtopic 470-20, Debt—Debt with Conversion and Other Options. 
• The changes stem from a request that PricewaterhouseCoopers, KPMG, Ernst & Young, and Deloitte made to the U.S. accounting standard setter’s Emerging Issues Task Force in November 2022, CFO Dive previously reported. The amendments will go into effect for annual reporting periods beginning after Dec. 15, 2025 and interim periods within those periods.

Dive Insight:

Convertible bonds are sometimes viewed as “toxic” debt, but they can be an attractive option for tech startups or other growth-oriented firms that face short-term financing challenges, CFO Dive previously reported. The updated standards come as the convertible debt market appears to be gaining momentum. 

U.S. primary market convertible bond issuance rose to $51.6 billion last year from $28.4 billion in 2022, though that’s below the recent peak of $113.7 billion hit in 2020, according to Bank of America Global Research data cited in a report from global asset manager Lord Abbett. This year issuance is projected to rise to $80 billion. Among the most recent issuers: Bitcoin treasury company MicroStrategy on Nov. 20 announced the pricing of convertible senior notes with an aggregate principal amount of $2.6 billion. 

The publication of the standards update represents the last formal step that the U.S. accounting standard setter takes to deliver final updated guidance.

The debt rules were developed after questions were raised about how report preparers should apply the guidance to settlements of the instruments that are cash conversions or other settlement routes that have become popular. Under current GAAP guidance, companies must decide whether to treat a convertible debt settlement that differs from the original terms as an induced conversion or a debt extinguishment, according to the release. 

The amendments clarify that certain settlements, such as convertible debt with cash conversion features or ones that are not currently convertible, should be treated as an induced conversion. 

Actions that constitute changed terms include: a drop in the conversion price that results in the issuance of more shares, an issuance of warrants or other securities not included in the original terms and the payment of cash to debt holders that convert during a certain period, according to the updated guidance. 

The convertible debt standards update comes just weeks after the FASB issued new, long-anticipated income statement expense rules. Earlier this week the board also sought further public comment on a clarification of the guidance language related to the interim effective date for the new rules for public companies that do not have an annual calendar reporting period ending Dec. 31. 

Because of how the guidance on the date was written, a company with a non-calendar year-end might think that it would have to comply with the new disclosure requirement in an interim reporting period rather than an annual period, the FASB said in the exposure draft of the proposed update. The new language “would clarify that all public business entities are required to adopt the guidance in annual reporting periods beginning after Dec. 15, 2026, and interim periods within annual reporting periods beginning after Dec. 15, 2027,”  the draft of the proposed update states. 

Public comments on the expense standards update are due Dec. 10.