10ASC 260 EARNINGS PER SHARE

PERSPECTIVE AND ISSUES

Technical Alert

In July 2017, the FASB issued ASU 2017-11. The ASU is in two parts and is titled Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815), I. Accounting for Certain Financial Instruments with Down Round Features, II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.

The ASU addresses narrow issues related to the complexity of applying GAAP to certain financial instruments with characteristics of liabilities and equity. This Technical Alert addresses Part I of the ASU. The chapter on ASC 480 deals with Part II of the ASU.

Guidance.

Part I of the ASU addresses the accounting for down round features. These are found in certain equity-linked instruments (or embedded features) that result in reduced strike price based on the pricing of future equity offerings. To address the complexity and resulting increased costs of accounting for these instruments, the ASU changes the classification analysis of certain equity-linked financial instruments with down round features. The ASU eliminates the requirement to consider down round features’ equity classification when assessing whether those instruments are indexed to an entity’s own stock. The ASU also clarifies disclosure requirements for equity-classified ...

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