FASB Study Delays Proposal on Liabilities, Equity Accounting

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By Steve Burkholder

July 19 — The Financial Accounting Standards Board and its private-company advisory panel seek further study on business-friendly financial instruments reporting for private enterprises.

In advancing with the study, FASB will delay proposed changes to accounting for financial instruments that possess traits of both liabilities and equity.

In its planned “targeted improvements” on liabilities and equity guidance, FASB plans to focus on changes that would lead to certain instruments with “down round” features no longer having to be classified as liabilities measured at fair value.

A down round feature in a convertible instrument or warrant, for example, calls for the strike price to adjust downward based on the pricing of future equity offerings, a FASB staff accountant said at the July 19 meeting of the board's Private Company Council.

FASB had planned to issue a draft of the improvements, focusing on the down round topic, by Sept. 30. However, the PCC took action on a specific disclosure-only suggestion for private companies, which led the board to revise its timetable.

Costly Restatements, SEC Attention

FASB is conducting a more general research project on accounting for instruments with characteristics of liability and equity. It does so with hopes of staking out a larger active project on liability/equity questions that have bedeviled accounting rulemakers for decades.

Errant reporting in the complex area of liabilities and equity accounting for instruments also has led to unwelcome attention from the Securities and Exchange Commission to some companies' reporting . Over the years, SEC regisrants have had to make costly restatements when they booked certain financial instruments as equity when they should have been recorded as liabilities.

Disclosure-Only Route for Certain Instruments

The council registered its tentative preference to explore an accounting approach that calls for private companies to make footnote disclosures for instruments with down round features that otherwise would be classified in equity. That would head off having to recognize amounts in the front of the financial statements under such circumstances.

PCC plans to consider at its Sept. 30 meeting more definitive action on the disclosure-only approach for equity-classified instruments with down round features. Depending on what stance the council takes, FASB would weigh a potential recommendation from the council on the topic.

The 10-member Private Company Council advises FASB on “the appropriate accounting treatment for private companies” on items actively being considered by the board.

A general mission of the PCC is to consider whether simpler accounting practices could be prescribed for private companies, differentiating treatments from those for public companies engaging in similar activities.

Refinances Exception in Debt Classification?

In other action July 19, the Private Company Council voted 9-1 to register leanings toward making an exception for refinances in the balance sheet classification of debt as current or non-current.

Creating such an exception would have the effect of retaining current accounting for refinances in debt classification, according to FASB's staff.

More specifically, the accounting issue pertains to treatment of short-term debt at the balance sheet reporting date that is later refinanced after the balance sheet date but before issuance of financial statements.

Under that refinancing scenario, the principle that underpins FASB's planned exposure draft on simplifying balance sheet classification of debt would lead to a classification of “current” because the borrower is in default as of the year end, according to a FASB background materials presented at the July 19 PCC meeting.

That would represent a change from current generally accepted accounting principles. GAAP today requires noncurrent classification.

FASB plans to issue a draft accounting standards update as part of its balance sheet classification project in the third quarter.

To contact the reporter on this story: Steve Burkholder in Norwalk, Conn., at sburkholder@bna.com

To contact the editor responsible for this story: Steven Marcy at smarcy@bna.com

For More Information

A brief summary of issues discussed by FASB and its Private Company Council is available at http://src.bna.com/gV5. A detailed slide presentation of the topics discussed at the July 19 council meeting is posted: http://src.bna.com/gV3.

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