Dive Brief:

• The Financial Accounting Standards Board is drawing close to finalizing a proposed update to accounting standards that will affect how companies account for certain convertible debt — and address concerns about the rules raised about current standards by the Big Four accounting firms.   
• The update affirmed by the FASB at a meeting Wednesday was aimed at providing clarity as to whether companies should account for settlements of certain convertible debt instruments as so-called induced conversions or extinguishments and at giving guidance for debt with cash-conversion features. 
• The proposed debt standard update's comment period concluded in March and the final update is poised to be effective for all companies as of fiscal years (and interim periods within fiscal years) beginning after Dec. 15, 2025.

Dive Insight:

Convertible bonds are a hybrid security that companies issue as debt which investors can later exchange for equity if the business grows and the stock value goes up, CFO Dive previously reported. Viewed by some as a toxic form of debt because of the often-struggling companies that historically had issued them, they have grown more popular amid the recent credit crunch. 

Last year saw a surge of U.S. companies heading into the convertible debt market, with issuance climbing 77% to $48 billion, according to a Financial Times report which cited data from LSEG. 

The changes to the standards that underpin generally accepted accounting principles stem from a request that PricewaterhouseCoopers, KPMG, Ernst & Young, and Deloitte made to the U.S. accounting standard setter’s Emerging Issues Task Force in November 2022.

The difference between induced conversion accounting and extinguishment accounting can be “significant” to a company’s financial statements, the letter outlining the request stated.   

“When extinguishment accounting applies, the gain or loss on extinguishment is now calculated based on the difference between the carrying amount of the convertible debt instrument and the fair value of the consideration issued on settlement,” the comment letter states. “Therefore, the conversion value of the debt can result in significant gains or losses on extinguishment.”  

The problem stems from the issuance of ASU 2020-06, which eliminated a separate accounting model for certain debt instruments with cash conversion features, according to a December KPMG report.

The standards update follows on the heels of a FASB vote to finalize new rules on expense disclosures.They will require public companies to disclose in the notes to their financial statements certain expenses such as purchases of inventory, employee compensation, depreciation and intangible asset amortization. The new requirements are expected to be a relatively heavy lift for companies because compliance will require them to collect significantly more data from a wide range of departments, CFO Dive previously reported.

Those new rules will be effective for fiscal years beginning after Dec. 15, 2026, and interim periods within fiscal years beginning after Dec. 15, 2027.

Correction: This story has been updated to show that the comment period for the proposed debt standards update concluded in March.