FASB proposes simpler approach for equity-linked contracts

FASB is seeking feedback on a proposed Accounting Standards Update (ASU) designed to simplify how companies determine whether equity-linked contracts, such as warrants, are tied to their own stock and therefore may qualify for equity classification.

According to a news release, Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Targeted Improvements to Indexation responds to stakeholder feedback that indexation guidance is complex, costly to apply, and a frequent source of financial statement restatements.

The proposed ASU would replace the current fixed-for-fixed assessment, which stakeholders find difficult to apply, with an acceptable variables approach. To improve the usefulness of information provided to investors, the proposal also would require annual disclosure of variables that could or did cause the settlement amount of equity-classified contracts to vary significantly.

Public comments are being accepted through Jan. 4.

— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at Bryan.Strickland@aicpa-cima.com.