Earlier this month, the FASB released an accounting standards update (ASU) to simplify accounting rules for hybrid financial instruments. ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity applies to all public and private entities that issue or invest in hybrid financial instruments that are issued in the form of a share. An example of a hybrid financial instrument issued in the form of a share is a preferred share that contains an embedded feature such as a redemption right.
ASU 2014-16 requires entities (issuers or investors) evaluate all substantive terms and features, implicit and explicit, when determining the nature of the host contract. The accounting update’s goal is to reduce the diversity in host contract evaluation that exists in current accounting practice.
Learn more in this MHM Messenger: Re-evaluation of Your Hybrid Financial Instruments May Be Required