The Financial Accounting Standards Board issued an Accounting Standards Update on Thursday that explains how an issuer should initially measure paid-in-kind dividends on equity-classified preferred stock.
The new guidance is a result of a recommendation made to the FASB by 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.
“The new ASU will enhance the comparability of financial information reported among companies that issue PIK dividends on equity-classified preferred stock,” FASB Chair Richard Jones said in a statement on April 23. “It also will provide investors with additional information about the liquidation value of the preferred stock that will be relevant to their capital allocation decisions.”
Stakeholders 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 was 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 said.
Stakeholders had noted that the diversity in practice reduces comparability of financial reporting information among entities that issue paid-in-kind dividends on equity-classified preferred stock.
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To address stakeholders’ concerns, the ASU requires 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.
The ASU states:
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 should initially measure the PIK dividend at that amount. The liquidation value (or liquidation preference) of the preferred stock is typically defined by the preferred stock agreement and specifies the value of the preferred stock upon the occurrence of a liquidation event (such as the entity becoming insolvent). When preferred stock is not issued at a discount or premium, the liquidation value upon initial issuance is typically the same as the original issuance price of the preferred stock.
The amendments in this Update improve GAAP by providing authoritative guidance for the initial measurement of PIK dividends on equity-classified preferred stock. Specifically, the amendments 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 amendments also provide clear, cost-effective guidance that will reduce complexity.
The amendments in the ASU are effective for all entities for annual reporting periods beginning after Dec. 15, 2026, and interim reporting periods within those annual reporting periods. Early adoption is permitted in an interim or annual reporting period in which financial statements haven’t yet been issued or made available for issuance. An entity adopting the amendments in an interim reporting period should apply them as of the beginning of the annual reporting period that includes that interim reporting period, the FASB says.
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