Perspectives

A roadmap to accounting for contracts on an entity's own equity

This Roadmap provides an overview of the guidance in ASC 815-40 as well as insights into and interpretations of how to apply it in practice. For ease of reference, we have accompanied our discussion with the related authoritative text. The 2020 edition includes several new and revised examples as well as some modifications to previously expressed views to reflect our latest thinking and input from standard setters and regulators.

We are pleased to present the 2020 edition of A Roadmap to Accounting for Contracts on an Entity’s Own Equity, which provides an overview of the guidance in ASC 815-40 as well as insights into and interpretations of how to apply it in practice. For ease of reference, we have accompanied our discussion with the related authoritative text. The 2020 edition includes several new and revised examples as well as some modifications to previously expressed views to reflect our latest thinking and input from standard setters and regulators. Appendix F highlights all new content as well as any substantive revisions to previous content.

We frequently receive questions related to the accounting for warrants, options, forwards, conversion features, and other contracts on an entity’s equity shares. Contracts on own equity are often lengthy and complex, and the related accounting guidance contains many detailed rules and exceptions. A contract’s particular wording can have significant accounting ramifications, such as whether the contract qualifies as equity or is an asset or a liability and the associated earnings effect. As a result, the SEC staff often asks registrants about their accounting for contracts on own equity and their supporting accounting analyses.

This Roadmap is intended to help you navigate the accounting guidance, overcome the complexity, and arrive at appropriate accounting conclusions. Note that as of the 2020 Roadmap’s publication date, the FASB is deliberating amendments to ASC 815-40 that would affect the analysis of whether contracts on an entity’s own equity qualify as equity. The Board plans to finalize the amendments and issue an ASU in the third quarter of 2020. See the Changing Lanes discussion in Chapter 1 for more information.

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The Roadmap series contains comprehensive, easy-to-understand accounting guides on selected topics of broad interest to the financial reporting community.

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