The Financial Accounting Standards Board (FASB) recently released Accounting Standards Update (ASU) 2026-01, Equity (Topic 505): Initial Measurement of Paid-in-Kind Dividends on Equity-Classified Preferred Stock. The ASU provides guidance on how an issuer should initially measure paid-in-kind (PIK) dividends on equity-classified preferred stock.
Preferred stock may include stated, cumulative dividends that accrue regardless of whether they are declared. Issuers may satisfy PIK dividend obligations either by delivering to the holder additional preferred stock with the same terms as the original preferred stock or by increasing the preferred stock’s liquidation value. ASU 2026-01 was issued in response to stakeholder concerns that a lack of guidance over initial measurement of PIK dividends was resulting in diversity in practice. Issuers currently measure PIK dividends using various practices including:
- At the fair value of the additional preferred stock issuable on the date that dividends are recognized, similar to stock dividends
- At the stated PIK dividend rate calculated in accordance with the terms of the preferred stock agreement
- At the fair value of the additional preferred stock issuable on the date that dividends are recognized or the stated PIK dividend rate depending on whether the PIK dividend is discretionary or nondiscretionary
The measurement of PIK dividends impacts the measurement of the equity-classified preferred stock in the financial statements and the calculation of earnings per share.
The ASU requires PIK dividends on equity-classified preferred stock 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 would initially measure the PIK dividend at that amount.
The amendments in this ASU 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 have not yet been issued or made available for issuance. An entity adopting the amendments in an interim reporting period should apply them as of the beginning of the annual reporting period that includes that interim reporting period.
The ASU provides for adoption of the amendments on either a prospective basis or on a modified retrospective basis for equity-classified preferred stock instruments that are outstanding as of the initial application date.
