Hi everyone.  Hope you are keeping healthy during the never ending COVID-19 pandemic.  For this month’s blog, I like to address a certain type of derivative product which the Financial Accounting Standards Board (FASB) enacted a simplification rule.  These Convertible instruments (both debt and preferred stock) under Accounting Standards Update- ASU No. 2020-06 “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)” stated that its goal was to greatly reduce the number of separations between the host contract and the derivative.  The ASU simplified accounting for convertible instruments by removing the major separation models required under GAAP. Under the ASU, unless the separation requirement still applies under an exception, the convertible debt instrument will be accounted for as a single liability measured at its amortized cost, while convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost. As addressed above, the separation model still applies when: (1) those with embedded conversion features  are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are required to be recorded as paid-in capital.  For those instruments that still need to be separated, fair value will still apply.  Until next time……..

Joel

 

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