Why Is the FASB Issuing This Accounting Standards Update (ASU)?

On November 26, 2024, the FASB issued ASU 2024-04, Debt—Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments to improve the relevance and consistency in the application of the induced conversion guidance in Subtopic 470-20, Debt—Debt with Conversion and Other Options.  This ASU addresses questions raised by stakeholders on how to determine whether a settlement of convertible debt, particularly cash convertible instruments at terms that differ from the original conversion terms, should be accounted for under the induced conversion or extinguishment guidance.

Under current generally accepted accounting principles (GAAP), the guidance on induced conversions applies only to conversions that include the issuance of equity securities pursuant to the conversion privileges provided in the terms of the debt at issuance.  Additionally, current GAAP does not address:

• How to apply the guidance for the settlement of debt instruments not requiring the issuance of securities (i.e., requiring cash).
• How to treat conversions that result in the holder receiving less cash or fewer shares than would have been received had the debt been settled in accordance with the original terms of the instrument.  This might happen due to the incorporation, elimination, or modification of a volume-weighted average price (VWAP) formula.

• Whether the guidance on induced conversions can be applied to the settlement of a convertible instrument at a time when it was not currently convertible.

What Are the Main Provisions?

Corresponding with bullets 1, 2, and 3 above, the amendments in ASU 2024-04:

• Clarify when a settlement should be accounted for as an induced conversion.  At a minimum, consideration issuable under the conversion terms of the instrument would need to be provided to the debt holder, along with the inducement offer.  
• Indicate that the incorporation, elimination, or modification of a VWAP formula would not automatically cause a settlement to be accounted for as an extinguishment (instead of an induced conversion).  An entity should assess whether the form and amount of conversion consideration still substantially meets what was provided for in the inducement offer, which would indicate that induced conversion guidance should be used.

• Clarify that induced conversion guidance can be applied to a convertible debt instrument not currently convertible, so long as it had a substantive conversion feature as of the issuance date and is otherwise within the scope of existing guidance.

Who Is Affected by the Amendments in This ASU?

The amendments in this ASU affect entities that settle convertible debt instruments for which the conversion privileges were changed to induce conversion.

When Will the Amendments Be Effective and What Are the Transition Requirements?

The amendments in this ASU are effective for all entities for annual reporting periods beginning after December 15, 2025, and interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities that have adopted the amendments in ASU 2020-06.

The amendments in this ASU permit an entity to apply the new guidance on either a prospective or a retrospective basis.

Read full ASU here:  ASU 2024-04