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The Financial Accounting Standards Board (FASB) has released an accounting standard update aimed at simplifying the accounting for financial instruments that have so-called “down round” features.
A down round is a provision or embedded feature in an equity-linked financial instrument that provides a downward adjustment to the current exercise price, based on the price of future equity offerings. Down round features can often be found in warrants, convertible preferred shares and convertible debt instruments issued by private companies and development-stage public companies.
The standards update came from a recommendation by the Private Company Council, which advises FASB on issues facing privately held companies. Some private companies and other stakeholders complained the current accounting guidance leads to unnecessary expense and complexity for businesses that issue financial instruments with down round features because they are forced to do fair value measurement of the entire instrument or conversion option on an ongoing basis.
They argued those types of adjustments created too much income statement volatility because of changes in the value of a company’s share price. They contended the adjustments didn’t reflect the true economics of the down round feature, which is actually supposed to protect investors from declines in share prices in some circumstances.
Read the story in Accounting Today here.