The objective of this project was to improve and align the two existing indexation models in Topic 480, Distinguishing Liabilities from Equity, and Subtopic 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, used to evaluate financial instruments with characteristics of equity by developing an indexation principle to reduce inconsistencies across GAAP.
Under its project that resulted in the issuance of Accounting Standards Update No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, the Board explored improvements to the derivatives scope exception for contracts in an entity’s own equity in Subtopic 815-40 as part of the proposed Accounting Standards Update, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which was issued on July 31, 2019. The amendments in that proposed Update included a remote likelihood threshold that would have allowed an entity to disregard certain contingent events when applying the derivatives scope exception. However, because of mixed views received from comment letter respondents and during outreach, the Board was unable to determine the operability and auditability of the those proposed amendments.
To avoid delaying the other amendments under the Distinguishing Liabilities from Equity project, at its February 5, 2020 meeting, the Board removed the amendments related to the remote likelihood threshold from that project’s scope and decided to further explore improvements to aspects of the derivatives scope exception guidance under the Distinguishing Liabilities from Equity Phase 2 project.
Final Project Update:
In April 2022, the Board discussed the results of staff research performed since the February 3, 2021 Board meeting, including feedback received on the liabilities and equity guidance in response to the 2021 Invitation to Comment, Agenda Consultation. On the basis of this research, the Board decided to deprioritize improvements to the liabilities and equity guidance at this time and removed the Phase 2 project from its technical agenda.