On April 23, 2026, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2026‑01, Equity (Topic 505): Initial Measurement of Paid‑in‑Kind Dividends on Equity‑Classified Preferred Stock.
The ASU provides authoritative guidance on how issuers should initially measure paid‑in‑kind (PIK) dividends on equity‑classified preferred stock—an area of U.S. GAAP that previously lacked explicit direction and resulted in diversity in practice.
This guidance is particularly relevant for private equity- and venture‑backed companies, where preferred equity instruments with PIK dividend features are common.
Background
Stakeholders raised concerns that U.S. GAAP did not specify how PIK dividends on equity‑classified preferred stock should be initially measured. As a result, entities applied differing methodologies, affecting both:
- Measurement of preferred equity on the balance sheet, and
- Determination of income available to common shareholders for earnings per share (EPS) purposes
The FASB issued ASU 2026‑01 to reduce diversity in practice and improve comparability across entities with similar capital structures.
Key Accounting Change
Under ASU 2026‑01, issuers are required to initially measure PIK dividends based on the PIK dividend rate stated in the preferred stock agreement. In most cases, this results in measuring the PIK dividend by applying the contractual PIK rate to the liquidation value (or liquidation preference) of the preferred shares outstanding, as defined in the governing agreement.
The measured amount must be used consistently for:
- Recording the PIK dividend in equity, and
- Calculating the reduction to income available to common shareholders for EPS, when applicable
What the ASU Does Not Change
The amendments are limited to initial measurement and do not affect:
- When PIK dividends are recognized, or
- When they affect earnings per share
Existing GAAP continues to apply with respect to recognition, presentation and EPS timing considerations.
Effective Date and Adoption
ASU 2026‑01 is effective for annual reporting periods beginning after December 15, 2026, including interim periods within those annual periods. Early adoption is permitted.
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