Alert

The Financial Accounting Standards Board (FASB) issued Proposed Accounting Standards Update (ASU), Equity (Topic 505): Initial Measurement of Paid-in-Kind Dividends on Equity-Classified Preferred Stock.

The proposed ASU would require issuers of equity-classified preferred stock to initially measure paid-in-kind (PIK) dividends based on the PIK dividend rate stated in the preferred stock agreement.

Comments were due October 27, 2025.

Scope

The proposed amendments would apply to all entities that issue PIK dividends on equity-classified preferred stock, whether convertible or nonconvertible, including preferred stock classified as temporary equity in accordance with paragraph 480-10-S99-3A.

The proposed amendments would be limited to equity-classified preferred stock with both of the following conditions:

• Dividends are satisfied by delivering to the holder additional preferred stock with the same terms as the original preferred stock or by increasing the value of the original preferred stock in accordance with the preferred stock agreement, such as by increasing the original preferred stock’s liquidation value.
• The monetary value of the PIK dividends varies based on the additional preferred stock issued.

The proposed amendments wouldn’t apply to PIK dividends satisfied by issuing a variable number of shares with a fixed monetary value.

Key Provisions

Current GAAP doesn’t address how entities should initially measure PIK dividends on equity-classified preferred stock. Stakeholders have indicated the lack of guidance results in diversity in practice, which affects the measurement of the equity-classified preferred stock presented on the statement of financial position and, for entities that report earnings per share, the amount of income available to common shareholders.

To address stakeholder feedback, the proposed ASU would provide authoritative guidance requiring entities to initially measure PIK dividends on equity-classified preferred stock that meet the scope criteria using the PIK dividend rate stated in the preferred stock agreement.

For example, if the preferred stock agreement specifies that PIK dividends are calculated by multiplying the PIK dividend rate by the liquidation value of the preferred stock outstanding, an entity would initially measure the PIK dividend at that amount. When preferred stock isn’t issued at a discount or premium, the liquidation value is typically the original issuance price of the preferred stock.

The proposed amendments wouldn’t affect when to recognize PIK dividends or the subsequent measurement of PIK dividends on preferred stock classified as temporary equity.

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Additional Resources

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