The Financial Accounting Standards Board has issued ASU No. 2021-04, Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options that is intended to reduce diversity in practice in the accounting for the modification or exchange of freestanding equity-classified written call options that remain equity classified after the modification or exchange.

Under the new guidance, an entity should treat these modifications and exchanges as an exchange of the original instrument for a new instrument. The ASU also includes measurement guidance which indicates that the effect of the modification should reflect the substance of the transaction, as if cash had been paid as consideration. The ASU includes specific guidance for certain scenarios including, when the modification or exchange is related to a change in an existing debt instrument or when it is part of a financing transaction to raise equity or debt. Modifications or exchanges related to written call options that compensate for goods or services are excluded from the scope of this ASU.

The amendments are effective for interim and annual periods beginning after December 15, 2021 and are to be applied prospectively to modifications and exchanges that occur on or after the effective date. Early adoption is permitted.

The full text of ASU 2021-04 is available here.

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