The FASB on March 24, 2021, ratified its Emerging Issues Task Force’s (EITF) decision to finalize a narrowly scoped proposal on modifications of freestanding equity-classified written call options that remain in equity.

The board approved the EITF’s decision to require all companies – both public and private – to apply the changes to fiscal years after Dec. 15, 2021, and interim periods within. Earlier application is allowed.

FASB member Susan Cosper observed the EITF should have supported remarks made by a Private Company Council (PCC) member, who said the effective date should be staggered for private companies as is consistent with the Private Company Decision Making Framework (PCDMF). Cosper said, however, she would not dissent on finalizing the changes for those reasons.

Similarly, FASB Vice Chair James Kroeker said requiring one effective date for all companies has the potential to confuse private companies “if we start picking effective dates that differ from the PCDMF.” And “so I wouldn’t have done that - I appreciate that the EITF did, therefore I will accept their consensus but I hope in the future that we don’t do that,” he said. “And I do think that the cost benefit is justified.”

Affirms limited scope

The board issued Proposed Accounting Standards Update (ASU) No. 2020-800, Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Forwards and Options a consensus of the Emerging Issues Task Force, on Oct. 26, 2020. It received nine comment letter responses by the Dec. 28 deadline.

The guidance will require companies “to treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as an exchange of the original instrument for a new instrument.” It also clarifies how to measure the effect of the modification, and maps out other recognition issues.

The proposal was scoped broadly to include an issuer’s accounting for modifications of freestanding equity-classified forwards and options that remain equity classified after modification. However, at the EITF’s March 11, the panel said after considering feedback from public comments, it would limit the scope to “an issuer’s accounting for modifications of freestanding equity-classified written call options that remain equity classified after modification.”

Board members said they agreed with limiting the scope of the guidance, observing that the comment letter responses and EITF discussions were helpful.

“I do think that the expected benefits of the changes justify the expected cost of the changes,” FASB member Christine Botosan said. “I found the comment letters and the discussion feedback that we got on the expanded scope that led to the decision to ultimately go back to the original scope currently helpful. That was the one area that I felt uncertain about when we went out with the proposal because I just felt we hadn’t gotten a lot of input before that decision was made on whether there might be unexpected consequences of expanding the scope and I thought that the comment letters did a really nice job of providing us with some input.”

Drops licensing project

Separately, the board voted to remove Issue No. 19-B, Revenue Recognition—Contract Modification of Licenses of Intellectual Property, from its technical agenda.

The topic will be studied through the board’s post implementation review (PIR) of Topic 606, Revenue from Contracts with Customers, the board’s process for determining whether a standard worked as intended.

FASB members said more issues could emerge from the PIR in the area of licensing.

“I support the more holistic approach. When I hear piecemeal, I really think that’s a return to industry-specific guidance, FASB member Gary Buesser said. “You can call it piecemeal, you can call it holistic, but in reality once you open that door you can’t close it. Every industry will come back with their specific preferred revenue recognition pattern that will never end,” he said. “Again it defeats the whole purpose of [Topic] 606. I believe looking at a more holistic top down approach makes a lot more sense.”

The project was added to the EITF’s agenda in May 2019 to clarify the accounting for revenue recognition for contract modifications of licenses of intellectual property (IP), as companies differ in how they interpret the rules.

The EITF on March 11 said the issue should be handled by the board because of the ongoing PIR being done to revenue recognition rules.

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