New ASU Clarifies Measurement of Paid-in-Kind Dividends

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• The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2026-01, “Equity (Topic 505): Initial Measurement of Paid-in-Kind Dividends on Equity-Classified Preferred Stock,” which clarifies that paid-in-kind (PIK) dividends on equity-classified preferred stock should be initially measured based on the contractual PIK dividend rate.
• While the ASU provides authoritative guidance on the measurement of PIK dividends, it does not address the timing of recognition.
• The ASU is effective for all entities for annual reporting periods after Dec. 15, 2026, including interim periods within those annual reporting periods. Early adoption is permitted.

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Background

Like common stock, preferred stock represents an ownership interest in an entity, but it provides preferential rights to cash flows before the rights of common shareholders. Some preferred stock agreements require or permit dividends to be settled in kind, either by issuing additional preferred shares with the same terms as the original preferred stock or by increasing the value of the existing preferred stock, such as by increasing its liquidation value. These PIK dividend features are similar in concept to debt instruments that capitalize accrued interest into the principal balance.

Before ASU 2026-01, Topic 505, “Equity,” did not provide specific guidance on how an issuer should initially measure PIK dividends on equity-classified preferred stock. As a result, diversity in practice on how to measure PIK dividends existed. For example, some entities measured PIK dividends at the fair value of the additional preferred stock issuable on the date the dividends were recognized; others measured them using the PIK dividend rate stated in the preferred stock agreement.

That diversity affected both the carrying amount of equity-classified preferred stock presented in the statement of financial position and, for entities that report earnings per share (EPS), income available to common shareholders. The Emerging Issues Task Force recommended the FASB add narrow-scope guidance to Topic 505 to improve comparability and reduce complexity.

Key details

Scoping guidance

ASU 2026-01 applies to PIK dividends on equity-classified preferred stock, whether convertible or nonconvertible or presented in temporary equity. For purposes of the new guidance, PIK dividends are dividends that an issuer satisfies by doing either of the following:

• Delivering to the holder additional preferred stock with the same terms as the original preferred stock
• Increasing the value of the original preferred stock in accordance with its contractual terms, such as by increasing its liquidation value

The new measurement 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.

The guidance does not apply when an issuer satisfies a dividend obligation by issuing a variable number of shares of the same preferred stock with a fixed monetary value. The ASU also does not apply to deemed dividends, such as certain redemptions of preferred stock; dividends payable in equity securities with terms that differ from the original preferred stock, such as common stock; nonmonetary distributions accounted for under Topic 845, “Nonmonetary Transactions”; or preferred stock classified as a liability under Topic 480, “Distinguishing Liabilities From Equity.”

Crowe observation: Entities should carefully evaluate preferred stock terms before concluding that a dividend feature is in scope of the ASU. In particular, entities should distinguish PIK dividends in scope of the ASU from fixed monetary dividend obligations that are settled in shares. Securities and Exchange Commission registrants also should note that preferred stock classified as temporary equity is within the scope of the new initial measurement guidance, although the ASU does not change the subsequent measurement guidance applicable to those instruments.

Initial measurement

Under ASU 2026-01, an issuer initially measures in-scope PIK dividends based on the contractual dividend rate stated in the preferred stock agreement. For example, if the contract terms specify that PIK dividends are calculated by multiplying the PIK dividend rate by the liquidation value of the preferred stock outstanding, the issuer measures the PIK dividend at that amount. The ASU does not require an issuer to estimate the fair value of the PIK dividend or determine whether the dividend is discretionary or nondiscretionary. The FASB concluded that the stated-rate approach is more objective and less costly to apply than fair value or effective-interest alternatives and provides information about the liquidation value and relative preference of the preferred shareholders’ claims.

Crowe observation: The measurement amount of PIK dividends under ASU 2026-01 reduces income available to common shareholders in the calculation of EPS. Entities that previously measured PIK dividends at fair value should assess the effect of the change on equity, income available to common shareholders, and affected per-share amounts.

Recognition timing

ASU 2026-01 addresses only initial measurement and does not change an entity’s determination of when to recognize PIK dividends. Entities therefore should continue to apply existing guidance and the terms of the preferred stock agreement when determining the timing of recognition.

Disclosure

Entities that adopt the ASU prospectively must disclose the nature of the change in accounting principle, including an explanation of the newly adopted accounting principle, and the method used to apply the change.

Entities that adopt the ASU under a modified retrospective transaction approach must provide the same disclosures and also disclose:

• The cumulative effect of the change on retained earnings or other components of equity as of the beginning of the earliest period presented
• The effect of the change on income available to common shareholders and any other affected line items
• The effect of the change on per-share amounts for the current reporting period and any prior reporting periods retrospectively adjusted

Effective date and transition

ASU 2026-01 is effective for all entities for annual reporting periods beginning after Dec. 15, 2026, including interim periods within those annual periods. Early adoption is permitted in both interim and annual periods in which financial statements have not yet been made available for issuance. An entity that adopts the amendments in an interim period must apply the amendments as of the beginning of the annual reporting period that includes that interim period.

Entities may apply ASU 2026-01 on a prospective basis or on a modified retrospective basis. Under the prospective approach, an issuer applies the amendments to in-scope PIK dividends recognized on or after the initial application date.

Under the modified retrospective approach, an issuer recasts prior reporting periods presented and records a cumulative-effect adjustment to retained earnings or other appropriate components of equity as of the beginning of the earliest period presented. This approach applies to PIK dividends recognized on equity-classified preferred stock that is outstanding as of the initial application date; entities are not required to apply the amendments to instruments that are no longer outstanding as of that date.

Crowe observation: Entities that have issued preferred stock with PIK dividend features should inventory those instruments and evaluate whether existing accounting policies align with ASU 2026-01. Entities also should consider whether systems, equity rollforwards, EPS calculations, and disclosure controls capture the information needed to apply the stated-rate measurement approach and the selected transition method.