FASB clarifies accounting for certain call option modifications

By Ken Tysiac

FASB issued a standard Monday that is designed to clarify an issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options that remain equity-classified after modification or exchange.

Warrants are one example of the type of call option covered by this guidance.

The Accounting Standards Update provides guidance on how an issuer would measure and recognize the effects of these transactions. The standard provides a principles-based framework to determine whether an issuer should recognize the modification or exchange as an adjustment to equity or an expense.

The new rules take effect for all entities for fiscal years beginning after Dec. 15, 2021, including interim periods within those fiscal years. Entities are required to apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments.

Early adoption is permitted for all entities, as is adoption during an interim period. If an entity elects to early adopt the amendments during an interim period, the guidance is required to be applied as of the beginning of the fiscal year that includes the interim period.

The standard is based on a consensus of FASB’s Emerging Issues Task Force.

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.

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