Convertible instrument disclosure improvements receive backing

The Financial Accounting Standards Board (FASB) at its Feb. 13, 2019, meeting backed a series of improvements to convertible instrument disclosures, including the format in which that information can be presented to investors. The board stopped short of requiring those disclosures to be presented in a tabular format, and instead backed an option in which issuers could use either a tabular or narrative disclosure.

The discussion is part of the FASB’s decades-old project to simplify its liabilities and equities guidance. Critics say the existing guidance in FASB Accounting Standards Codification (ASC) 480, Distinguishing Liabilities From Equity, is too complex and contains too many internal inconsistencies.

As part of that effort, the FASB staff recommended several disclosure improvements for convertible instruments.

The board unanimously supported the staff’s recommendations on those disclosures, which would add a disclosure objective for convertible preferred shares and convertible debt; amend guidance on certain terms and features, such as including a disclosure around control of the conversion option and events that significantly affect conversion conditions; align disclosure guidance between contingently convertible instruments and other convertible instruments; and centralize the guidance for convertible debt and convertible preferred shares.

Contingently convertible instruments are those that convert based on certain triggering events, such as the price of a company’s stock reaching a certain threshold.

Also under those disclosure improvements, the board supported amending the fair value disclosure guidance under Accounting Standards Update (ASU) No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, for convertible instruments to require disclosure at the individual instrument level.

Most of the discussion on the subject centered on the format for the disclosures, specifically whether the board should mandate a tabular format.

The board tentatively voted in favor of improving the format of convertible instrument disclosures related to basic information, including principal amount and coupon rate; certain interest expense data; and certain long-term debt maturities and sinking fund requirements.

Board members expressed hesitancy to require those disclosures to be in a tabular format, which staff believes would help users better evaluate detailed information on convertible instruments.

The board opted for a more flexible option, instead telling staff to prepare illustrative examples for the implementation guidance including both a narrative and tabular disclosure.

“I like the suggestion not to prescribe a format,” said FASB Member Marsha Hunt. “But I do think our illustrations should be helpful to try and help evolve best practice. So, I think that where we’re going is to try and help steer that direction and still leaving people room for judgment.”

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