Dive Brief:

• The Financial Accounting Standards Board issued an update Wednesday to improve financial reporting of convertible instruments and contracts in an entity's own equity.
• The updated standard simplifies accounting for convertible instruments by removing major separation models required under GAAP rules.
• Under the change, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. 

Dive Insight:

"The accounting standards update (ASU) is an important step in simplifying a complex area of accounting guidance that has been a frequent source of financial statement restatements," FASB Vice Chairman James Kroeker said. "We expect it to improve comparability of information for financial statement users and reduce cost and complexity for preparers and auditors."

The update removes certain settlement conditions required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted earnings per share calculation in certain areas.

The update is effective for large public companies for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.

For smaller public companies and all other entities, the new standard will be effective for fiscal years beginning after December 15, 2023, including interim periods. Early adoption is permitted.