{"id":971,"date":"2019-04-02T13:55:06","date_gmt":"2019-04-02T13:55:06","guid":{"rendered":"https:\/\/www.excelsisaccounting.com\/blog\/?p=971"},"modified":"2019-04-02T13:55:07","modified_gmt":"2019-04-02T13:55:07","slug":"simplifying-the-accounting-rules-for-convertible-debt-and-equity","status":"publish","type":"post","link":"https:\/\/www.excelsisaccounting.com\/blog\/index.php\/2019\/04\/02\/simplifying-the-accounting-rules-for-convertible-debt-and-equity\/","title":{"rendered":"Simplifying the accounting rules for convertible debt and equity"},"content":{"rendered":"

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Distinguishing between liabilities and equity on a company\u2019s balance sheet may seem straightforward. But difficulties arise when it comes to the terms of complex securities and financial contracts like redeemable equity instruments, equity-linked or indexed instruments, and convertible instruments.<\/p>\n

The good news is that the Financial Accounting Standards Board (FASB) is currently working on a project to improve how to determine the difference between liabilities and equity. <\/p>\n

Need for change
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Work on this project dates as far back as 1986, when distinguishing liabilities from equity was added to the FASB\u2019s technical agenda. Since then, the board has issued various pieces of guidance to help resolve issues that have been raised. But the outcry for revisions to the liabilities vs. equity topic hasn\u2019t waned. <\/p>\n

In 2017, accounting professionals told the FASB that current guidance is \u201coverly complex, internally inconsistent, path dependent, form based and is a cause for frequent financial statement restatements.\u201d<\/p>\n

Once again, the project is a top priority for the FASB. In 2019, deliberations will initially focus on two areas: <\/p>\n

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  1. Accounting for convertible instruments with embedded conversion features, and<\/li>\n
  2. Determining whether instruments are indexed to an entity\u2019s own stock.<\/li>\n<\/ol>\n

    A convertible instrument, typically a bond or a preferred stock, is an instrument that can be converted into a different security \u2014 often shares of the company\u2019s common stock. For example, emerging and growing companies often use convertible debt as an alternative financing solution. It\u2019s basically a loan obtained by a company from venture capital or angel investors whereby both parties agree to convert the debt into equity at a specific date.<\/p>\n

    Tentative plans
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    Convertible instruments create complex accounting issues and have become a major source of confusion and restatements. In February 2019, the FASB tentatively voted to:<\/p>\n