The Financial Accounting Standards Board is seeking public comment on a proposed Accounting Standards Update the board issued on Sept. 30 that would provide authoritative guidance on how an issuer should initially measure paid-in-kind dividends on equity-classified preferred stock.
The proposed ASU is based on a recommendation of the Emerging Issues Task Force. That panel assists the FASB in improving financial reporting through the timely identification, discussion, and resolution of financial accounting issues within the framework of the Accounting Standards Codification.
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Stakeholders have expressed concerns that current GAAP doesn’t address how an issuer should initially measure paid-in-kind dividends on equity-classified preferred stock.
“As a result, there is 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,” the FASB states in the proposed ASU. “Stakeholders have noted that the diversity in practice reduces comparability of financial reporting information among entities that issue PIK dividends on equity-classified preferred stock.”
To address these concerns, the proposed ASU would require that paid-in-kind dividends on equity-classified preferred stock be initially measured on the basis of the paid-in-kind dividend rate stated in the preferred stock agreement.
“Specifically, the proposed amendments would improve the decision usefulness of the financial reporting information provided to investors by (1) enhancing the comparability of financial information reported among entities that issue PIK dividends on equity-classified preferred stock and (2) providing additional information about the liquidation value of the preferred stock, which helps investors to understand the amount and preference of relative claims on an entity,” the FASB said. “The proposed amendments also would provide clear, cost-effective guidance that would reduce complexity and diversity in practice.”
According to the standard-setting board, an entity would be permitted to apply the amendments in this proposed ASU using one of the following transition methods:
- On a prospective basis, or
- On a modified retrospective basis for equity-classified preferred stock instruments that are outstanding as of the initial application date.
Comments on the proposed ASU can be submitted to the FASB by Oct. 27, 2025.
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