This chapter discusses the accounting for convertible debt, including the accounting treatment of modifications, conversion, and extinguishment of convertible debt after the adoption of ASU 2020-06.

Determining the appropriate accounting for convertible debt requires a detailed understanding of the instrument’s terms. It will typically require a detailed evaluation of any potential embedded derivatives. Although the accounting literature has been simplified as a result of ASU 2020-06, it can still be difficult to navigate and apply.

In August 2020, the FASB issued ASU 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). The ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. The FASB reduced the number of accounting models for convertible debt and convertible preferred stock instruments and made certain disclosure amendments to improve the information provided to users. In addition, the FASB amended the derivative guidance for the “own stock” scope exception (see FG 5) and certain aspects of the EPS guidance.

For public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, the guidance is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The one-time determination of whether an entity is eligible to be a smaller reporting company is based on an entity’s most recent determination as of August 5, 2020, in accordance with SEC regulations. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The FASB also specified that an entity must adopt the guidance as of the beginning of its annual fiscal year and is not permitted to adopt the guidance in an interim period, other than the first interim period of their fiscal year.

The guidance in this chapter has been updated to reflect ASU 2020-06 and is thus only applicable after a reporting entity has adopted ASU 2020-06. See FG 6A for convertible debt accounting guidance before the adoption of ASU 2020-06.