FASB issues ASU on convertible debt instruments
Defining Issues | December 2024
The ASU provides additional guidance on induced conversions and extinguishment accounting.
ASU 2024-04 provides guidance on whether induced conversion or extinguishment accounting should be applied to certain settlements of convertible debt instruments that do not occur in accordance with the instruments’ preexisting terms.
Applicability
Relevant dates
- November 26, 2024 – FASB issued ASU 2024-04
| All entities |
Annual periods – Fiscal years beginning after | December 15, 2025 |
Interim periods – In fiscal years beginning after | December 15, 2025 |
Early adoption permitted for entities that have adopted the amendments in Update 2020-06? | Yes |
Key Impacts:
ASU 2024-04 requires entities to apply a preexisting contract approach to determine whether to apply induced conversion accounting.
Under the preexisting contract approach, the inducement offer is required to preserve the form of consideration and result in an amount of consideration that is no less than that issuable pursuant to the preexisting conversion privileges.
- The preexisting and modified conversion privileges are to be assessed as of the offer acceptance date.
- To the extent convertible debt instruments have been exchanged or modified within the one-year period preceding the offer acceptance date, the entity uses the terms of the convertible debt instrument as they existed one year before the offer acceptance date in evaluating whether the form and amount of consideration test for inducement accounting is satisfied.
The new ASU also clarifies that induced conversion accounting applies to convertible debt instruments within the scope of Subtopic 470-20 that are not currently convertible, as long as the instrument contained a substantive conversion feature as of both its issuance date and the inducement offer acceptance date.
Report contents
- Applicability
- Fast facts, impacts, actions
- Background
- Preexisting contract approach
- Clarification of certain criteria
- Currently convertible instruments
- Transition and transition disclosure
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