Alert: FASB Accounting Standards Update No. 2017-11 – Earnings Per Share, Distinguishing Liabilities from Equity, and Derivatives and Hedging

Category: US GAAP

Alert: FASB Accounting Standards Update No. 2017-11 – Earnings Per Share, Distinguishing Liabilities from Equity, and Derivatives and Hedging

On July 13, 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-11 Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815). The ASU is divided into the two following parts:

Part I – Accounting for Certain Financial Instruments with Down Round Features

Part I amends Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815) related to the accounting for financial instruments that include down round features (i.e., features that reduce the current exercise price based on the price of future equity offerings). The changes relate to the recognition/classification and measurement of, and the calculation of earnings per share for, freestanding and embedded financial instruments.

The ASU ignores the down round feature when determining the liability or equity classification of an instrument. Therefore, a down round feature no longer precludes equity classification. The amendments also require an adjustment to an entity’s basic earnings per share calculation for the effect of the down round feature once it is triggered. Further, the ASU clarifies the existing disclosure requirements for equity-classified instruments.

The amendments in Part I are effective as follows:

  • Public business entities – fiscal years beginning after December 15, 2018, including interim periods therein.
  • All other entities – fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

Early adoption, including in an interim period, is permitted. Adjustments resulting from the early adoption of this ASU in an interim period should be reflected at the beginning of the fiscal year that includes that interim period.

The amendments should be applied retrospectively for outstanding financial instruments with a down round feature by using either a:

  • Modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption); or
  • Fully retrospective approach for all prior reporting periods presented in the period of adoption in accordance with the guidance on accounting changes in Topic 250 Accounting Changes and Error Corrections.

Part II – Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Non-public Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception

Part II amends Topic 480 to replace the indefinite deferral of certain provisions regarding mandatorily redeemable financial instruments of private entities and certain mandatorily redeemable non-controlling interests with a scope exception. These amendments do not have an accounting effect, and therefore do not have an effective date or any transition guidance.

To access the full script of ASU No. 2017-11, click here.

This communication contains a general overview of the topic and is current as of July 13, 2017. The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly, this publication is not a substitute for professional advice and we recommend that any decisions you take about the application or not of any of the information presented be made in consultation with a qualified professional, who can address any variance that may be required to reflect your circumstances. Please contact your local MNP representative for customized assistance with the application of this material. MNP LLP accepts no responsibility or liability for any loss related to any person's use of or reliance upon this material. © MNP LLP 2017. All rights reserved.

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Michelle Balmer

Michelle Balmer CPA, CA

Vice President, Assurance

Michelle Balmer, CPA, CA, is a Senior Assurance Services Partner with MNP. With 14 years of experience in public practice, Michelle helps a broad range of public and privately held companies in a variety of industries. She also works on special projects, including costing studies, benchmarking and best-practice studies, operational analyses, litigation support and due diligence.

As a key member of MNP's Assurance team, Michelle has played an instrumental role in assurance policy development, implementing accounting and assurance standards firm-wide and educating assurance practitioners regarding methodologies and new pronouncements. She also provides technical advice and consultation on accounting and assurance issues, as well as on rules of professional conduct issues, to all MNP practitioners.

Michelle was certified a Chartered Accountant (CA) after obtaining a Bachelor of Commerce degree from the University of Alberta. She has been actively involved with the Institute of Chartered Accountants of Alberta, including the Chartered Accountants School of Business, in an instructional and marketing capacity. An avid volunteer, she has assisted numerous groups such as the Easter Seals of Alberta, Paralympic Sports Association and Junior Achievement of Northern Alberta.