KPMG Financial Reporting podcast Podcast: Unpacking the FASB's convertible debt proposed ASU
Jan 12, 2024
The discussion dives into the FASB's proposed ASU regarding the accounting for convertible debt instruments. It emphasizes the complexities of induced conversions and extinguishment accounting. Experts outline challenges organizations face and offer guidance on navigating the new rules. Key considerations for assessing inducement offers against original terms are explored with illustrative examples. Practical advice on transitioning to the new accounting model and the importance of consulting with advisors rounds out the insightful conversation.
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Complexity of Convertible Debt Accounting
- The traditional accounting model for induced conversions wasn't designed for cash convertible instruments like instrument C and X.
- With the elimination of the cash conversion feature model in ASU 2020-06, significant uncertainty exists about whether induced conversion or extinguishment accounting applies.
Pre-existing Contract Approach Explained
- The FASB proposes a 'pre-existing contract approach' requiring inducements to preserve original consideration form and amount.
- For instrument C, preserving form means giving at least the original cash plus shares upon conversion to apply induced conversion accounting.
Timing and Valuation Clarifications
- Inducements are assessed when accepted by the holder, aligning with the inducement expense measurement date.
- The addition or modification of VWAP formulas doesn't automatically mean extinguishment; fair value at offer date is key.