As discussed in a prior blog, the new convertible accounting rules in ASU 2020-06 will take effect in 2022. However, companies may early adopt the rules starting in 2021. We summarize the new accounting rules below:
Summary of New Accounting Rules
- Bifurcating the bond into debt and equity components will no longer take place; the full principal amount will be booked as debt
- For bonds that can only be net share settled, the coupon will be the interest expense and share dilution calculations will remain unchanged (i.e. in-the-money share calculations)
- For bonds that can be flexibly settled (any combination of cash and stock), full share settlement is assumed; for EPS, the company will use the more dilutive of coupon through the income statement or the full underlying shares added to share count
- The new rules must be adopted for fiscal years starting after 15-Dec-21, although early adoption is permitted for any fiscal year starting after 15-Dec-20
How Many Companies are Early Adopting?
In our previous post, we searched Q4-2020 EDGAR filings algorithmically for key words related to the accounting change for companies that have issued convertible bonds since 2017. We updated the search for Q1-2021 filings. These are of particular interest because they relate to financial reporting periods for which the new standard is potentially applicable.
![](https://matthewssouth.com/wp-content/uploads/2021/07/2021-07-26_225807.png)
Below are the top 10 companies by market capitalization that have stated they will or will not early adopt.
![](https://matthewssouth.com/wp-content/uploads/2021/07/2021-07-26_225821.png)
Please do not hesitate to reach out to any member of the Matthews South team with questions on this topic.
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