United States

Update to our debt and equity guide related to down round features


We have updated our guide, Accounting for debt and equity instruments in financing transactions, to reflect FASB Accounting Standards Update (ASU) 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Upon its adoption, Part I of ASU 2017-11 will result in freestanding equity-linked financial instruments, such as warrants, and conversion options in convertible debt or preferred stock to no longer be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. It is important to note, however, that ongoing derivative treatment may be required for other reasons. It is, therefore, necessary to reperform the accounting analysis for outstanding freestanding equity-linked financial instruments and embedded features that required derivative treatment due to a down round feature as though the ASU was in effect throughout the life of each instrument to determine whether reclassification is appropriate, and if so, the adjustments necessary to reflect the impact of adoption. Appendix C of our guide provides an overview of ASU 2017-11 (including its effective date and transition provisions) and discusses the accounting upon a down round feature being triggered, as well as important considerations that arise in implementing the ASU.