The Financial Accounting Standards Board on Wednesday finalized changes to accounting standards meant to simplify complexities surrounding liabilities and equities.

The Accounting Standards Update (ASU No. 2020-06) is the payoff to a proposal from last summer. The change is meant to improve guidance in Generally Accepted Accounting Principles (GAAP) for certain financial instruments that have characteristics of both liabilities and equities, including convertible instruments.

“The ASU is an important step in simplifying a complex area of accounting guidance that has been a frequent source of financial statement restatements,” said FASB Vice Chairman James L. Kroeker in a press release. “We expect it to improve comparability of information for financial statement users and reduce cost and complexity for preparers and auditors.”

In drafting the ASU, the board zeroed in on two specific areas where improved guidance was warranted, FASB had said last year. Convertible instruments, for example bonds that can be converted to shares at maturity, were particularly problematic, along with contracts in an entity’s own equity that may qualify for an exception from derivative accounting.

The ASU simplifies accounting for convertible instruments by removing major separation models required under GAAP. Under the ASU, convertible debt instruments will more likely be accounted for as a single liability measured at its amortized cost, while convertible preferred stocks are more likely to be accounted for as a single equity instrument measured at its historical cost.

With respect to contracts in an entity’s own equity, the board simplified conditions around settlement assessments by removing the requirements (1) to consider whether the contract would be settled in registered shares, (2) to consider whether collateral is required to be posted, and (3) to assess shareholder rights.

The ASU also simplifies diluted earnings per share calculations for instruments that may be settled in cash or shares and for convertible instruments.

Finalizing the ASU had been listed as a priority by former FASB Chair Russell Golden before the end of his term June 30. He had said back in December that comments on the update were mostly positive, as “stakeholders described guidance in this area as overly complex, internally inconsistent, and the source of frequent financial restatements.”

However, during feedback, FASB said it received mixed reaction to its related proposal to simplify the accounting for equity contracts by reducing form-over-substance-based accounting conclusions that are driven by remote contingent events in the assessment of the derivatives scope exception. Thus, those changes were left out of the ASU and will be further explored in a separate project at a later time.

The ASU is effective for public business entities that are Securities and Exchange Commission filers, excluding smaller reporting companies as defined by the SEC, for fiscal years beginning after Dec. 15, 2021, including interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal years beginning after Dec. 15, 2023, including interim periods within those fiscal years. Early adoption will be permitted.