Article
FASB updates initial measurement of PIK dividends
May 29, 2026
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2026-01, Equity (Topic 505): Initial Measurement of Paid-in-Kind Dividends on Equity-Classified Preferred Stock.
Under the new guidance, issuers of equity-classified preferred stock are required to initially measure paid-in-kind (PIK) dividends using the PIK dividend rate stated in the preferred stock agreement.
What is the scope of ASU 2026-01?
The amendments apply to all entities that issue PIK dividends on equity-classified preferred stock, including:
- Convertible and nonconvertible preferred stock
- Preferred stock classified as temporary equity in accordance with ASC 480-10-S99-3A
The amendments are limited to equity-classified preferred stock with both of the following conditions:
- Dividends are satisfied by issuing additional preferred stock with the same terms as the original preferred stock or by increasing the value of the original preferred stock in accordance with the preferred stock agreement, such as by increasing the liquidation value.
- The monetary value of the PIK dividends varies based on the additional preferred stock issued or the increase in liquidation value.
The amendments don’t apply to PIK dividends satisfied by issuing a variable number of shares with a fixed monetary value or to transactions that represent a deemed dividend.
What are the key provisions of ASU 2026-01?
PIK dividends are defined as dividends satisfied through either:
- The issuance of additional preferred stock with the same terms as the original preferred stock
- An increase in the liquidation value of the original preferred stock
Current GAAP doesn’t address how entities should initially measure PIK dividends on equity-classified preferred stock. Stakeholders have indicated the lack of guidance results in diversity in practice, which affects the measurement of the equity-classified preferred stock presented on the statement of financial position and, for entities that report earnings per share, the amount of income available to common shareholders.
To address stakeholder feedback, the ASU provides authoritative guidance requiring PIK dividends within the scope to be initially measured based on the PIK dividend rate stated in the preferred stock agreement.
For example, if the preferred stock agreement specifies that PIK dividends are calculated by multiplying the PIK dividend rate by the liquidation value of the preferred stock outstanding, an entity should initially measure the PIK dividend at that amount. When preferred stock isn’t issued at a discount or premium, the liquidation value is typically the original issuance price of the preferred stock.
The amendments don’t affect the timing of recognition of PIK dividends or change the subsequent measurement of PIK dividends.
Effective Dates
The amendments are effective for all entities for annual reporting periods beginning after December 15, 2026, and interim reporting periods within those annual reporting periods.
Early adoption is permitted in an interim or annual reporting period in which financial statements haven’t yet been issued or made available for issuance. If adopted in an interim reporting period, the amendments must be applied as of the beginning of the related annual reporting period.
Transition Requirements
The amendments permit entities to apply the new guidance using a prospective or modified retrospective transition approach.
- Prospective Transition Approach. Entities should apply the amendments to PIK dividends recognized on or after the initial application date.
- Modified Transition Approach. For previously issued PIK dividends recognized on equity-classified preferred stock outstanding as of the initial application date, entities should recast prior reporting periods presented and recognize a cumulative-effect adjustment to opening retained earnings as of the earliest period presented.