While existing guidance applies only to conversions involving the issuance of all equity securities specified in the original debt terms, the ASU addresses the lack clarity in guidance in GAAP by clarifying criteria for settlements involving convertible debt instruments that do not necessitate the issuance of equity securities upon conversion.
Additionally, the amendments clarify that the incorporation, elimination, or modification of a volume-weighted average price (VWAP) formula does not automatically result in an extinguishment. In these arrangements, entities must assess whether the form and amount of conversion consideration are maintained using the fair value of an entity's shares when the offer is accepted.
Entities can choose to apply ASU 2024-04 prospectively to any settlements after the effective date or retrospectively, recasting prior periods and recording a cumulative-effect adjustment to opening retained earnings. ASU 2024-04 is effective for fiscal years beginning after December 15, 2025 for all entities. Early adoption is permitted, provided that ASU 2020-06 has been adopted.
The full text of ASU 2024-04 can be found here.
Published: 01/06/2025
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