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ASU 2026-01, Equity (Topic 505): Initial Measurement of Paid-in-Kind Dividends on Equity-Classified Preferred Stock

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Accounting Standards Update (ASU) 2026-01 adds specific guidance to ASC 505, Equity, on the initial measurement of paid-in-kind (PIK) dividends on equity-classified preferred stock. Under the new guidance, in-scope PIK dividends are initially measured using the PIK dividend rate stated in the preferred stock agreement.  The ASU addresses initial measurement only. It does not change the timing of when dividends are recognized.

The ASU applies to preferred stock classified as equity, including certain preferred stock classified as temporary equity, and is effective for all entities for annual reporting periods beginning after December 15, 2026, including interim periods within those annual periods. Early adoption is permitted.

Why FASB Issued the Update

ASU 2026-01 provides explicit ASC guidance for measuring PIK dividends on preferred stock. The new guidance specifies that in-scope PIK dividends should be measured based on the contractual PIK dividend rate in the preferred stock agreement, thereby establishing a defined measurement approach within ASC 505.

Entities and Instruments in Scope

The guidance applies to all entities that issue in-scope PIK dividends on preferred stock classified as equity.

In-scope instruments include preferred stock classified as equity, including preferred stock classified as temporary equity under the SEC staff guidance on redeemable securities.

For purposes of the guidance, PIK dividends are dividends that an issuer satisfies by either:

  • Delivering additional preferred stock with the same terms as the original preferred stock; or
  • Increasing the value of the original preferred stock under the preferred stock agreement, such as by increasing the stock’s liquidation value.

The guidance applies when the monetary value of the PIK dividends varies based on the additional preferred stock issued or the increase in the original preferred stock’s liquidation value.

Key Accounting Change

ASU 2026-01 requires in-scope PIK dividends on preferred stock to be initially measured based on the PIK dividend rate stated in the preferred stock agreement.

For example, if the preferred stock agreement provides that PIK dividends are calculated by multiplying the stated PIK dividend rate by the liquidation value of the outstanding preferred stock, the entity measures the PIK dividend at that contractual amount.

The ASU addresses initial measurement only. It does not change the timing of when dividends are recognized.

Items Excluded from Scope

The new measurement guidance does not apply when:

  • The issuer satisfies a dividend obligation by issuing a variable number of shares of the same preferred stock instrument that has a fixed monetary value. For example, a $1,000 dividend obligation settled by delivering a variable number of shares with a current fair value of $1,000 is excluded.
  • The transaction represents a deemed dividend, such as certain redemptions of preferred stock.

Effective Date and Early Adoption

ASU 2026-01 is effective for all entities for:

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

Early adoption is permitted in an interim or annual reporting period if the financial statements have not yet been issued or made available for issuance. If adopted in an interim period, the entity must apply the guidance as of the beginning of the annual reporting period that includes that interim period.

Transition Methods and Required Disclosures

Entities may adopt ASU 2026-01 using either of the following transition methods:

Transition method Application
Prospective Apply the guidance to PIK dividends recognized on preferred stock on or after the initial application date.
Modified retrospective Record 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. Under this method, apply the guidance to PIK dividends recognized on preferred stock outstanding as of the initial application date.

Transition Disclosures — Prospective Adoption

For prospective adoption, an entity must disclose, in the interim period of adoption if applicable and the annual period of adoption:

  • The nature of the change in accounting principle, including an explanation of the newly adopted accounting principle; and
  • The method of applying the change.

Transition Disclosures — Modified Retrospective Adoption

For modified retrospective adoption, an entity must disclose, in the interim period of adoption if applicable and the annual period of adoption:

  • The nature of the change in accounting principle, including an explanation of the newly adopted accounting principle;
  • The method of applying the change;
  • The cumulative effect of the change on retained earnings or other components of equity as of the beginning of the earliest period presented; and
  • The effect of the change on income available to common shareholders, any other affected financial statement line items, and any affected per-share amounts for the current period and any retrospectively adjusted prior periods.

Implementation Considerations

Consider the following implementation steps:

  1. Inventory preferred stock instruments
    Identify outstanding preferred stock instruments, including those classified in permanent equity and temporary equity
  2. Review PIK dividend provisions
    Determine whether dividends are settled through issuance of additional preferred shares with the same terms or through increases to the original preferred stock’s value, such as liquidation preference adjustments.
  3. Identify excluded arrangements
    Evaluate whether any arrangements involve fixed monetary obligations settled in a variable number of shares or deemed dividends, which are excluded from the new guidance.
  4. Assess measurement differences
    Compare current measurement practices with the ASU’s requirement to measure based on the contractual PIK dividend rate stated in the preferred stock agreement.
  5. Select a transition method
    Evaluate the operational and financial reporting implications of prospective versus modified retrospective adoption, including the availability of historical data and potential effects on equity and EPS-related disclosures.
  6. Update accounting policies and controls
    Revise accounting policy documentation, closing procedures, and internal controls to capture contractual PIK dividend rates and apply the required measurement consistently.

Key Takeaways

  • ASU 2026-01 establishes a specific measurement model for in-scope PIK dividends on equity-classified preferred stock.
  • In-scope PIK dividends are initially measured using the PIK dividend rate stated in the preferred stock agreement.
  • The guidance applies to equity-classified preferred stock, including preferred stock classified as temporary equity.
  • Certain fixed-dollar obligations settled in a variable number of shares and deemed dividends are excluded.
  • The ASU is effective for annual periods beginning after December 15, 2026, including interim periods, with early adoption permitted.
  • Entities may apply the ASU prospectively or using a modified retrospective approach, with transition disclosures depending on the method selected.