Technical Alert - FASB ASU 2026-01 

 

In April 2026, the FASB issued ASU 2026-01, Equity (Topic 505): Initial Measurement of Paid-in-Kind Dividends on Equity-Classified Preferred Stock. The ASU addresses diversity in practice regarding the initial measurement of paid-in-kind (PIK) dividends on preferred stock classified as equity (including mezzanine equity under SEC guidance). Prior to this ASU, there was limited explicit guidance, leading to varied approaches (e.g., some entities using fair value or other methods).  

 

Guidance

 

PIK dividends must be initially measured based on the contractual PIK dividend rate stated in the preferred stock agreement. This measurement applies for: 

•  Recording the dividend in the financial statements. 

•  Calculating earnings per share (EPS).  

(ASC 505-10-30-1) 

 

The ASU does not change: 

•  The timing of when PIK dividends are recognized. 

•  Other aspects of accounting for preferred stock or dividends.

 

Effective Date 

For all entities (public and private): 

• Annual reporting periods beginning after December 15, 2026, and interim periods within those annual periods. 

• For calendar-year entities: Effective January 1, 2027. 

 

Early adoption permitted in any interim or annual period where financial statements have not yet been issued (or made available for issuance). If adopted in an interim period, apply as of the beginning of the annual period that includes that interim period.  

(ASC 505-10-65-1) 

 

Transition 

Entities can choose either method below. Note: there is no requirement to use the same for all instruments, but entities may want to consider the benefits of consistency. 

1.  Prospective Application: 

• Apply the new guidance (contractual PIK dividend rate) only to PIK dividends recognized on or after the initial application date. 

• Applies regardless of when the preferred stock was originally issued. 

• No restatement of prior periods; no cumulative adjustment.  

2.  Modified Retrospective Application: 

• Apply to PIK dividends on preferred stock instruments outstanding as of the initial application date. 

• Recognize a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate equity components) as of the beginning of the earliest period presented. 

• Recast prior periods presented for the affected instruments. 

• Does not apply to redeemed or settled instruments before the application date.

(ASC 505-10-65-1) 

 

Transition Disclosures 

For both methods: 

• Disclose the nature of the change in accounting principle and the method of applying the change. 

For modified retrospective only in addition: 

• Cumulative effect on retained earnings/other equity as of the beginning of the earliest period presented. 

• Effects on income available to common shareholders, other line items, and per-share amounts for the current and prior periods. 

(ASC 505-10-65-1)