Down-round features in financial instruments

Key impacts

Based on recent discussions with the FASB staff, we understand they have changed their view about what constitutes a down-round feature.

As defined in the Codification Master Glossary, a down-round feature is a provision in an equity-linked financial instrument that reduces the strike price of the instrument if the entity:

• sells additional shares of its common stock for an amount less than the current strike price of the instrument; or
• issues another equity-linked financial instrument with a strike price that is less than the currently stated strike price of the instrument. 

In our previous discussions with the FASB staff, they expressed the view that a provision that adjusts an equity-linked financial instrument’s strike price if the strike price of another equity-linked instrument(s) is modified after issuance would not meet the definition of a down-round feature. However, in recent discussions with the FASB staff, they indicated that they have become aware of diversity in practice in applying that definition and now believes a provision that adjusts an equity-linked financial instrument’s strike price if the strike price of another equity-linked instrument(s) is modified after issuance could meet the definition of a down-round feature. As a result of the evolution in the FASB staff’s view, we currently believe either view is acceptable as an accounting policy election that is consistently applied.

See section 8.8.60, specifically Question 8.8.170, in our Handbook: Debt and equity financing for guidance that reflects our recent discussions with the FASB staff.