The Update on Down Round—FASB Reclassifies Earnings Per Share

The Financial Accounting Standards Board (FASB) has set forth amended guidance aimed at simplifying and reclassifying certain features of financial instruments. Accounting Standards Update (ASU) No. 2017-11 – Earnings Per Share (Topic 260) contains amendments that address earnings per share (EPS) classification and financial instruments with down round features. (A down round provision is a financing aspect in which the company sells shares of its capital at a price that is less per share than the price for which it sold shares in a previous financing.)

Part I is geared toward reducing the complexity that is associated with the issuer’s accounting for certain financial instruments with characteristics of liabilities and equity. Part II of the ASU recharacterizes the indefinite deferral of Topic 480, which established standards for the way in which an issuer classified certain financial instruments with characteristics of both liability and equity. Back in December 2016, FASB issued an “indefinite deferral of accounting requirements in Topic 480 for mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests.”

With the existing classification methodology, the down round feature typically results in the classification of the instrument, or the embedded feature, as a liability (rather than equity) which is then remeasured to fair value through earnings per period. This new ASU does not change the accounting aspect for liability-classified financial instruments.

However, under the new standard, once an entity determines whether the financial instrument should be classified as a liability or as an equity instrument, the down round feature is irrelevant in determining if the scope exception from derivative accounting is applicable. Once a down round feature of a self-supporting financial instrument is prompted, the worth of the result is the difference between the fair value of the financial instrument based on the strike price before discount, and the fair value of the financial instrument based on the strike price after discount.

Another aspect of this Update is the presentation of EPS. Under Accounting Standards Codification (ASC) 260, entities should recognize the value of the effect of this down round feature as a dividend in equity and a reduction of income available to stockholders in EPS calculation.

This standard is effective for public companies with annual reporting periods beginning after December 15, 2018.  For non-public companies, this standard will be effective for annual reporting periods beginning after December 15, 2019, and interim periods with annual reporting periods beginning after December 15, 2020. Early adoption is permitted for all entities, but they must provide disclosures in accordance with ASC 250-10-50 within the period in which the Update is adopted.  There is no effective date for Part II of the ASU, as it does not have any accounting impacts.


If you have questions about the ASU or reclassification or would like to request a speaker on this topic for your organization or event, contact one of our PYA executives below at (800) 270-9629.


Mike Shamblin

Mike Shamblin

Managing Principal of Audit & Assurance Services

Doug Arnold

Doug Arnold


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