ASU 2026-01: Initial measurement of paid-in-kind dividends

Scope

The amendments apply to equity-classified preferred stock, including preferred stock that is classified as temporary equity under ASC 480-10-S99-3A, but do not apply to preferred stock classified as a liability under ASC 480.

The new guidance applies to both discretionary and nondiscretionary PIK dividend obligations that are satisfied by either (1) delivering additional preferred stock with the same terms as the original preferred stock, or (2) increasing the value of the original preferred stock (for instance, by increasing its liquidation preference in accordance with the preferred stock agreement).

The amendments do not apply to the following:

• Dividend obligations satisfied by issuing a variable number of preferred shares with a fixed monetary value
• Deemed dividends (for example, certain redemptions of preferred stock)
• Dividends payable in common stock or other equity securities with terms that differ from the original preferred stock
• Nonmonetary distributions of assets accounted for under ASC 845

The amendments only provide guidance on the initial measurement of PIK dividends; entities should refer to other U.S. GAAP for guidance on recognition and subsequent measurement.

Initial measurement

The new guidance specifies that entities should initially measure PIK dividends on equity-classified preferred stock using the PIK dividend rate stated in the preferred stock agreement. This rate is often stated as a percentage of the preferred stock liquidation preference, which is also typically defined by the preferred stock agreement and represents the amount payable to the holder upon a liquidation event. The liquidation preference and original issuance price are often equal but may differ if the preferred stock was issued at a discount or premium. 

Effective date and transition

The amendments 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 reporting periods. If adopted in an interim period, an entity must apply the amendments as of the beginning of the annual period that includes that interim period.

Entities may choose one of the following transition methods:

• Apply the amendments prospectively to PIK dividends recognized on equity-classified preferred stock on or after the initial application date.
• Apply the amendments retrospectively through a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the earliest period presented for PIK dividends recognized on equity-classified preferred stock outstanding as of the initial application date. In other words, the amendments would not apply to preferred stock that was redeemed or otherwise settled before the initial application date.

In the period of adoption, all entities are required to disclose the nature of the change in accounting principle, an explanation of the newly adopted accounting principle, and the method of applying that new principle. 

For entities that apply the amendments retrospectively, the following disclosures are also required:

• Cumulative effect of the change on retained earnings or other components of equity as of the beginning of the earliest period presented
• 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 reporting period and any prior reporting periods retrospectively adjusted 

1 $500,000 liquidation preference × 5 percent annual PIK dividend rate ÷ $5.00 per share original issuance price.
2 $500,000 liquidation preference × 5 percent annual PIK dividend rate.