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ASU 2020-06 includes new disclosure requirements for convertible instruments as outlined below. The guidance also establishes disclosure objectives for convertible preferred stock in order for stakeholders to better understand the detailed disclosure requirements. ASC 505-10-50-12 provides the objectives of the new disclosures:

ASC 505-10-50-12

The objective of the disclosure about convertible preferred stock is to provide users of financial statements with:
a.  Information about the terms and features of convertible preferred stock
b.  An understanding of how those instruments have been reported in an entity’s statement of financial position and statement of financial performance
c.  Information about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity’s future cash flows related to those instruments.

7.11.1 Disclosure of pertinent rights and privileges—after adoption of ASU 2020-06

Reporting entities should explain the pertinent rights and privileges of each convertible preferred stock instrument outstanding. ASC 505-10-50-13 provides a list of requirements (not all inclusive) for convertible preferred stock.

ASC 505-10-50-13

To comply with the general disclosure requirements of paragraph 505-10-50-3, an entity shall explain the pertinent rights and privileges of each outstanding instrument, including, but not limited to, the following information:
a.  Number of shares issued and par value
b.  Dividends
c.  Conversion or exercise prices or rates and number of shares into which the instrument is potentially convertible
d.  Pertinent dates, such as conversion date(s) and maturity date
e.  Parties that control the conversion rights
f.  Manner of settlement upon conversion and any alternative settlement methods, such as cash, shares, or a combination of cash and shares
g.  Terms that may change conversion or exercise prices, number of shares to be issued, or other conversion rights and the timing of those rights (excluding standard antidilution provisions)
h.  Liquidation preference and unusual voting rights, if applicable
i.  Other material terms and features of the instrument that are not listed above.

7.11.2 Disclosure of contingently convertible instruments—after adoption of ASU 2020-06

For contingently convertible instruments, reporting entities should disclose information about events or changes in circumstances that would adjust or change the contingency or would cause the contingency to be met in accordance with ASC 505-10-50-14. In addition, information on whether the shares that would be issued if converted are included in diluted EPS and the reasons why or why not should be disclosed. Other information that is helpful to understand the nature of contingencies and potential impact of conversion should also be disclosed.

7.11.3 Disclosures for dividends declared—after adoption of ASU 2020-06

Reporting entities should disclose the amount of dividends declared for each period for which a statement of financial performance is presented, in addition to the existing disclosures required by ASC 505-10-50-5.

7.11.4 Additional disclosures for preferred stock–after adoption of ASU 2020-06

ASC 505-10-50-16 provides additional information entities should disclose as of the date of the latest statement of financial position presented.

ASC 505-10-50-16

An entity shall disclose the following information as of the date of the latest statement of financial position presented:
a.  Changes to conversion or exercise prices that occur during the reporting period other than changes due to standard antidilution provisions
b.  Events or changes in circumstances that occur during the reporting period that cause conversion contingencies to be met or conversion terms to be significantly changed
c.  Number of shares issued upon conversion, exercise, or satisfaction of required conditions during the reporting period

7.11.5 Derivative disclosures–after adoption of ASU 2020-06

The disclosures in ASC 815 are required for a conversion option that is accounted for as a derivative. Reporting entities should also disclose the following information about derivative transactions entered into in connection with the issuance of convertible preferred stock, regardless of whether the derivative transactions are accounted for as assets, liabilities, or equity instruments:
  • The terms of the derivative transactions (including terms of settlement)
  • How those derivative transactions relate to the convertible preferred stock
  • Number of shares underlying the derivative transactions
  • Reason for entering into those derivative transactions

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