FASB ISSUES Accounting Standards Update 2026-01 EQUITY (Topic 505) – Initial Measurement of Paid-in-Kind Dividends on Equity-Classified as Preferred Stock - April 2026 Summary

Summary

Why Is the FASB Issuing This Accounting Standards Update?

The Board is issuing this Update to provide authoritative guidance on how an issuer should initially measure paid-in-kind (PIK) dividends on equity-classified preferred stock. The amendments do not affect an entity’s determination of when to recognize PIK dividends.

Stakeholders expressed concerns that current generally accepted accounting principles (GAAP) do not address how an issuer should initially measure PIK 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. Stakeholders 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 stakeholders’ concerns, the amendments in this Update provide authoritative guidance on how to initially measure PIK dividends on equity-classified preferred stock.

Who Is Affected by the Amendments in This Update?

 The amendments in this Update apply to all entities that issue PIK dividends on equity-classified preferred stock.

What Are the Main Provisions, How Do the Main Provisions Differ from Current Generally Accepted Accounting Principles (GAAP), and Why Are They an Improvement?

 The amendments in this Update require that PIK dividends on equity-classified preferred stock be initially measured on the basis of the PIK dividend rate stated in the preferred stock agreement. 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.

NSAC members, please log into Connect to continue reading this article in The Coopertive Accountant Summer 2026.