The Financial Accounting Standards Board (FASB) issued an Accounting Standard Update (ASU 2020-06) on August 5, 2020 to simplify the accounting for convertible instruments and contracts in a company’s own equity.
FASB also made changes to the earnings per share (EPS) calculation and disclosures for convertible instruments and contracts in an entity’s own equity.
Smaller reporting companies are defined as either having public float below $250 million, regardless of the amount of revenue, or having less than $100 million in revenue and public float less than $700 million.
The first four models require the convertible instrument to be separated into two components: the host debt or preferred stock component and the conversion component.
Contracts in an Entity’s Own EquityExisting rules allow certain financial instruments to be excluded from complex derivative accounting if they meet two criteria:The instrument is indexed to the entity’s own stock (the “indexation criterion”); andThe contract is classified as equity (the “settlement criterion”)If both criteria are met, the instrument is classified as equity and avoids derivative accounting.
If any of the conditions is not met, it is possible for the instrument to be cash settled and it would fail the settlement criterion.you should see it : find accountant for company analysisThe seven conditions are as follows:Settlement is permitted in unregistered sharesThe entity has sufficient authorized and unissued shares available to settle the contractThe contract contains an explicit limit on the number of shares to be delivered in a settlementThere are no required cash payments to the counterpartyThere are no cash settled top-off or make-whole provisionsNo counterparty rights rank higher than shareholder rightsNo collateral is requiredEarnings per ShareCurrent guidance allows two methods for calculating EPS – the if-converted method and the treasury stock method.
