Two businessmen with a laptop and folder of documents discussing changes to financial statement assertions

 

Is your company aware of the latest developments in financial statement assertions surrounding convertible debt? If not, now is the best time to start preparing. Let’s review how ASU 2020-06 affects the accounting for convertible instruments and how businesses can plan ahead for future PCOAB and private company audits.

ASU 2020-06 Overview

The Financial Accounting Standards Board (FASB) released ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This standard simplifies the guidance on accounting for financial instruments that can be classified as either debt or equity. In particular, ASU 2020-06 affects the accounting for convertible debt instruments.

Effective Date

While this new guidance went into effect for any SEC audit for fiscal years beginning after December 15, 2021. For smaller reporting companies, ASU 2020-06 is effective after December 15, 2022, and for all other entities, this guidance and its amendments are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. And for many private companies, this means the new guidance is applicable for financial statement audits starting this year.

How Does This Affect Your Company?

The biggest takeaway from ASU 2020-06 related to convertible debt is that there are now only three accounting models to allocate convertible debt. ASU 2020-06 removes convertible debt with bifurcated derivative (BCF) and convertible debt with a cash conversion feature (CCF). When auditors assess the value of a company’s debt during a financial statement audit, these new changes will affect which contracts are considered assets or liabilities. As a result, more contracts will qualify for equity classification.

Ways to Prepare for ASU 2020-06

The new accounting standard ASU 2020-06 about the conversion feature in debt is a significant change for public companies and private company audits this year. Here are some ways your company can prepare for ASU 2020-06:

  • Review convertible debt instruments: Assess the impact of the new standard on your financial instruments and make any necessary changes.
  • Update financial statement presentation: ASU 2020-06 requires the fair value of the liability component of convertible debt instruments to be separated from the equity component. Ensure all financial statements reflect this requirement.
  • Evaluate systems and processes: Every new accounting standard is an opportunity to review and update financial systems, processes, and internal controls. Check to ensure the company’s financial team has the tools they need to be compliant with ASU 2020-06.
  • Consult your audit team: If you are unsure about preparing for the new standard, consult with your CPA auditors to develop a plan for implementing the new standard.

 

 

Plan Compliant Financial Statement Assertions

ASU 2020-06 is a major change to the accounting guidance around convertible instruments and financial statement assertions. This new standard means that if your company has any convertible debt, it’s the optimal time to create a plan to transition and apply the new guidance.

If you have questions or need assistance with an upcoming audit or review, our team at Assurance Dimensions can help. Contact us today to work with a CPA firm with an experienced team of accounting professionals.