FASB releases standard on induced conversions of convertible debt instruments

The Financial Accounting Standards Board issued an accounting standards update Tuesday aimed at improving the existing guidance on induced conversions of convertible debt instruments. 

The ASU revises the guidance in FASB Accounting Standards Codification Subtopic 470-20, “Debt—Debt with Conversion and Other Options.” The current guidance helps with determining whether a settlement of convertible instruments at terms different from the original conversion terms should be accounted for as an induced conversion (as opposed to a debt extinguishment). But since that guidance was written in the context of share-settled convertible debt instruments, some of FASB’s constituents asked how to apply it to settlements of convertible debt instruments with cash conversion and other features that have become more popular in the marketplace.

Some convertible debt instruments include provisions enabling a debtor to change the terms of the debt to the benefit of debt holders. In some cases, conversion privileges for a convertible debt instrument are changed or extra consideration is paid to debt holders for the purpose of inducing prompt conversion of the debt instrument to equity securities (which is sometimes referred to as a convertible debt sweetener). These kinds of provisions can be general in nature, allowing the debtor or trustee to take actions to protect the interests of the debt holders, or they can be specific, such as specifically authorizing the debtor to temporarily reduce the conversion price for the purpose of inducing a conversion.

The amendments in the update clarify the requirements for determining whether certain settlements of convertible debt instruments, including convertible debt instruments with cash conversion features or convertible debt instruments that are not currently convertible, should be accounted for as an induced conversion.

The amendments take effect for annual reporting periods starting after Dec. 15, 2025, and interim reporting periods within those annual reporting periods, but early adoption is allowed.