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Question FG 10-1 and Question FG 10-2 discuss the impact of ASU 2020-06 on capitalized interest.
Question FG 10-1
A reporting entity issued a convertible bond with an embedded conversion option. The embedded conversion option was accounted for in equity under prior GAAP and created a debt discount. The reporting entity capitalized the interest cost as part of its historical cost of acquiring certain assets under ASC 835-20. Under the new guidance, the instrument is required to be accounted for as traditional convertible debt (i.e., no separate accounting of the conversion option).
Should the reporting entity consider the effects of the changes in interest expense on the amount of capitalized interest costs as a result of adopting ASU 2020-06?
PwC response
Yes. If as a result of the adoption of ASU 2020-06, the change in the amount of interest accrued on these instruments changes, then the resulting impact and effect on the amount capitalized must also be reflected.
It is important to note that the effect may be different depending on the method of adoption. For example, under the modified retrospective method, the effect of adoption would only apply to those instruments that are outstanding at the date of adoption, whereas under the full retrospective method, it would apply to all historical debt instruments within the scope of the ASU.
Question FG 10-2
A reporting entity issued debt with warrants that were recognized at fair value and classified as a liability under prior GAAP. The reporting entity capitalized the interest cost as part of its historical cost of acquiring certain assets under ASC 835-20. Under the new guidance, the warrants qualify for equity treatment. This change in classification of warrants from liability to equity would result in changing the method of allocating consideration from the residual method of allocation (i.e., allocate consideration to warrants based on their fair value and remaining consideration to the debt) to a relative fair value allocation method. As a result, the debt discount and resulting interest expense may change.
Should the reporting entity consider the effects of the changes in interest expense on the amount of capitalized interest costs as a result of adopting ASU 2020-06?
PwC response
Yes. If as a result of the adoption of ASU 2020-06, the change in the amount of interest accrued on these instruments changes, then the resulting impact and effect on the amount capitalized must also be reflected.
It is important to note that the effect may be different depending on the method of adoption. For example, under the modified retrospective method, the effect of adoption would only apply to those instruments that are outstanding at the date of adoption, whereas under the full retrospective method, it would apply to all historical debt instruments within the scope of the ASU.
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