Technical Alert – ASU 2025-12

 

In December 2025, the FASB issued ASU 2025-12, Codification Improvements, as part of its project to correct, clarify, and make narrow improvements to U.S. GAAP. The amendments in this ASU address thirty-three issues across a range of topics.

 

Guidance

 

The ASU’s amendments are generally not expected to have a significant effect on accounting practice. However, the following issues addressed in ASU 2025-12 could affect current practice and discussed below:

• Issue 4: Clarify the Calculation of Earnings per Share When a Loss from Continuing Operations Exists

• Issue 10: Clarify Methods to Account for Treasury Stock Retirements

• Issue 16: Add Reference to Other-Than-Temporary Impairment (OTTI) for Equity Method Investments 

 

Diluted EPS calculation (Issue 4)

  Prior to ASU 2025-12, in periods when an entity reports a loss from continuing operations, ASC 260 had conflicting guidance about the effect of potential common shares on diluted earnings per share (EPS) 

 

The amendments in ASU 2025-12 clarify that when a loss from continuing operations exists, including potential common shares in the denominator is generally (as opposed to always) antidilutive. Under the amended guidance, entities incurring losses from continuing operations must consider whether potential common shares are dilutive based on adjustments made to both the numerator, if any, and the denominator in the diluted EPS calculation.

 

Transition requirements specific to Issue 4

Entities must apply the amendments to ASC 260 on a retrospective basis for each period presented. When the combined effect of a numerator and denominator adjustment is dilutive for a prior period, the entity must recast the diluted EPS calculation for that period. If the effect is antidilutive, no recast is required.

 

Under the amended guidance, entities incurring losses from continuing operations must consider whether potential common shares are dilutive based on adjustments made to both the numerator, if any, and the denominator in the diluted EPS calculation.

 

Accounting for treasury stock retirements (Issue 10)

When an entity retires stock or repurchases stock for constructive retirement, the guidance in ASC 505-30-30-8 explicitly allows two methods to account for any excess repurchase price over par or stated value: 

• Allocate the excess between (1) additional paid-in-capital (APIC), limited to the amount attributable to the same issue as the shares being retired, and (2) retained earnings.

• Charge the excess entirely to retained earnings.

 

However, ASU 2025-12 notes that Accounting Research Bulletin 43, where the guidance in ASC 505-30-30-8 originates, also refers to a third method of accounting: Recognize the excess amount entirely as a reduction to APIC. This method was inadvertently excluded from ASC 505 but has been generally accepted in practice. Accordingly, the amendments add this third method to ASC 505-30-30-8 permitting entities to record the excess entirely to APIC, provided that it does not cause APIC to become negative. 

 

Fair value option election (Issue 16)

Under ASC 825, entities are permitted to elect the fair value option for an eligible instrument if an event occurs that requires the instrument to be measured at fair value but does not require remeasurement at fair value thereafter, with certain exceptions.

 

Before the effective date of the amendments in ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduced the current expected credit losses (CECL) model, one of those exceptions was recognizing an other-than-temporary impairment (OTTI). Specifically, an entity was prohibited from electing the fair value option upon recognizing an OTTI, even though OTTI recognition requires the asset to be written down to its fair value.

 

Among other things, the amendments in ASU 2016-13 eliminated the OTTI model for available-for-sale debt securities, and the FASB made a conforming amendment to remove the OTTI exception described above from the fair value option guidance in ASC 825. However, that conforming amendment did not take into account that equity method investments were still subject to an OTTI model after entities adopted the amendments in ASU 2016-13. Therefore, it became unclear whether an entity could elect the fair value option upon recognizing an OTTI on its equity method investment based on the guidance in ASC 825.

 

As a result, the amendments in ASU 2025-12 correct the unintended removal of the OTTI exception from ASC 825-10-25-4(e) by clarifying that entities are not permitted to elect the fair value option for an equity method investment upon recognizing an OTTI. 

 

Effective Date 

The amendments in ASU 2025-12 are effective for all entities in annual reporting periods beginning after December 15, 2026 and in interim periods within those annual reporting periods. Early adoption is permitted in both interim and annual periods, and an entity may elect to early adopt the amendments on an issue-by-issue basis.

 

If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the respective annual reporting period.

(ASC 105-10-65-1)

 

Transition 

Aside from Issue 4, entities may choose one of the following transition methods, which may also be elected on an issue-by-issue basis:

• Prospectively to all transactions recognized on or after the date when the amendments are first applied

• Retrospectively to the beginning of the earliest period presented

(ASC 105-10-65-1)

 

Addendum

 

Listed below are the other issues in the ASU. 

Issue 1: Remove the Master Glossary Term Amortized Cost Remove the Master Glossary term amortized cost. 

Issue 2: Clarify Comparative Financial Statement Presentation Requirements 

Issue 3: Correct Error in Comprehensive Income Example

Issue 5: Clarify Disclosure Requirements for Lease Receivables Arising from Sales-Type Leases or Direct Financing Leases

Issue 6: Clarify Calculation of the Reference Amount for Beneficial Interests 

Issue 7: Link to Master Glossary Term Class of Financing Receivable 

Issue 8: Remove Previously Superseded Paragraph Related to Leases Guidance

Issue 9: Update References to Capitalization Guidance for Environmental Remediation Costs

Issue 11: Correct Error in Repurchase Agreement Illustrative Example 

Issue 12: Align Intraperiod Tax Allocation Guidance 

Issue 13: Remove Reference to Pooling-of-Interests Method

Issue 14: Update References for Investments in Equity Securities Guidance

Issue 15: Update References for NFP Presentation Guidance

Issue 17: Update Illustrative Statement of Cash Flows for an Entity That Is in Reorganization

Issue 18: Update Fresh-Start Illustrative Example  

Issue 19: Remove Reference to Cost Method Investments  

Issue 20: Clarify Guidance for the Transfer of Receivables from Contracts with Customers 

Issue 21: Correct Sentence Fragment in Transfers and Servicing Implementation Guidance

Issue 22: Remove OTTI Guidance 

Issue 23: Clarify the Applicability of NFP Consolidation Guidance 

Issue 24: Remove the Phrase Recognized and Unrecognized from NFP and Health Care Entities Income Statement Guidance

Issue 25: Clarify Accounting for Certain Receivables by Not-for-Profit Entities 

Issue 27: Clarify Impairment Guidance for Institutions of Higher Education 

Issue 28: Remove Reference to Equity Securities in the NFP Other Investment Guidance 

Issue 29: Remove Reference to a Probability Assessment in Evaluating Whether to Recognize Part of a Transaction as a Contribution

Issue 30: Update NFP Business Combinations Guidance to Reference Exceptions to the Recognition Principle 

Issue 31: Clarify Relevant Guidance for an NFP That Is an Acquirer  

Issue 32: Add Cross-Reference to Hedge Documentation and Hedge Effectiveness Guidance for Certain NFPs 

Issue 33: Update Defined Contribution Plan Illustrative Example

Issue 34: Update Real Estate Guidance to Refer to the Use of the Proportional Amortization Method