Stay on top of the latest updates from the FASB! In this episode, Jaclyn Veno breaks down the new exposure draft on paid-in-kind dividends for equity-classified preferred stock.
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What paid-in-kind dividends are and the difference between discretionary and non-discretionary types
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Why the FASB released this exposure draft and the issues it aims to address
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Key requirements for initial measurement based on stock agreements and liquidation value
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Transition methods available for entities and details about the effective date
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Quick overview of comment period timing and a shout-out to GLS training opportunities
FASB Issues Exposure Draft on Paid-In-Kind Dividends: What You Need to Know
Hello, and welcome to the Genuine Learning Blog from Galasso Learning Solutions – your go-to resource for timely and relevant updates from all of the major standard setters. If you’ve been wondering about the latest exposure draft from the FASB, you’re in the right place! In this post, we’re diving into their recent proposal focused on Paid-In-Kind (PIK) dividends on equity-classified preferred stock.
What Are Paid-In-Kind Dividends?
To start, let’s clarify what a Paid-In-Kind dividend is in this context. Instead of paying shareholders in cash, issuers distribute additional shares of a company’s preferred stock. There are two varieties:
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Discretionary PIK: Issuers can choose whether to pay the dividend in cash or in stock.
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Non-discretionary PIK: Issuers are required to pay the dividend in stock; there’s no option for cash.
Why Did FASB Issue This Exposure Draft?
Currently, US GAAP does not specifically address how issuers should initially measure PIK dividends on equity-classified preferred stock. This lack of authoritative guidance has led to varying practices across organizations, which has in turn reduced comparability. Stakeholders have flagged this as a pain point, prompting the FASB to act.
The main goal of the proposed amendment is to introduce clear, authoritative guidance for initial measurement of these dividends—helping to eliminate diversity in practice and improve comparability.
What Does the Exposure Draft Propose?
The scope is quite narrow—it applies only to entities issuing PIK dividends on equity-classified preferred stock.
The key update is the method of initial measurement. Issuers are required to base their measurement on:
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The stated dividend rate
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Liquidation price preferences, all of which are detailed in the preferred stock agreement. For example, if an agreement specifies that PIK dividends should be calculated by multiplying the dividend rate by the liquidation value of the outstanding preferred stock, then that’s how it should be measured.
The draft also clarifies how to determine liquidation value. It’s set by the terms of the stock agreement and represents the amount payable to preferred shareholders if a liquidation event occurs, such as insolvency. Usually, if preferred stock is issued at its original price (with no discount or premium), its initial liquidation value equals its issuance price.
Impact and Transition
If adopted, these amendments will undoubtedly strengthen GAAP in this area. The regulatory clarity should reduce both complexity and diversity in practice, and result in more cost-effective, straightforward guidance for issuers.
Entities also have a choice of transition method: either a prospective basis or a modified retrospective basis.
Timing and Next Steps
Interestingly, FASB did not propose an effective date yet. They will set it after reviewing stakeholder feedback. It’s worth noting that the comment period was brief—the draft was issued on September 30 and feedback was due by October 27.
If you have any more questions about this exposure draft or want to see how GLS can help you stay current with ever-changing standards, don’t hesitate to reach out. See you in the next blog post!
