FASB issues final ASU on PIK dividends on equity-classified preferred stock.

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The FASB has issued ASU 2026-01 to provide new guidance on the measurement of paid-in-kind (PIK) dividends on equity-classified preferred stock.

Applicability

ASU 2026-01

All entities that issue paid-in-kind (PIK) dividends on equity-classified preferred stock, whether convertible or nonconvertible, including preferred stock classified as temporary equity (but excluding preferred stock classified as a liability under ASC 480).

Relevant dates

Effective date	All entities
Annual periods – Fiscal years beginning after	December 15, 2026
Interim periods –Fiscal years beginning after	December 15, 2026
Early adoption allowed in interim or annual reporting periods for which financial statements have not yet been issued or made available for issuance?	Yes

Key impacts

The ASU standardizes the initial measurement of PIK dividends on equity-classified preferred stock. It requires that these dividends be initially measured based on the PIK dividend rate as stated in the preferred stock agreement. For instance, if the agreement calculates the dividend rate by multiplying the PIK rate of 8% by the stock's liquidation value of $1,000, the entity would measure and record a dividend of $80.

Historically, some entities have measured PIK dividends based on the fair value of the equity-classified preferred stock at the dividend date or using an effective yield method. This change in initial measurement method may affect earnings per share (EPS) calculations to the extent it alters income available to common shareholders.

The ASU has certain scope limitations, such as the exclusion of PIK dividends on liability-classified preferred stock and nonmonetary asset transfers accounted for under ASC 845.

Application and transition

The amendments are effective for interim and annual reporting periods in fiscal years beginning after December 15, 2026.

Early adoption is permitted in an interim or annual reporting period for which financial statements have not yet been issued or made available for issuance. If adopting early in an interim period, entities are required to adopt as of the beginning of that interim period or the beginning of the annual reporting period that includes that interim reporting period.

Entities have two options for transitioning to the new guidance.

Transition method	Description
Prospective	Apply the ASU’s amendments only to PIK dividends on equity-classified preferred stock recognized on or after the effective date.
Modified Retrospective	Recast prior reporting periods presented, with a cumulative-effect adjustment to equity as of the beginning of the earliest period presented related to previously issued PIK dividends on equity-classified preferred stock that is outstanding as of the date of adoption.

Early adoption of the new standard is permitted.

Transition disclosures

Entities must disclose the nature of the accounting change and the transition method selected. If adopting on a modified retrospective basis, they must also disclose the cumulative effect of the change on retained earnings and the effect on income available to common shareholders and other affected financial statement line items for the current and prior periods. These disclosures are required in both interim and annual financial statements for the period of adoption.