Adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity

12 Months Ended

Dec. 31, 2022

Adoption Of Asu 2020-06 Accounting For Convertible Instruments And Contracts In Entitys Own Equity

Adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity

3. Adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies the accounting for convertible instruments by removing certain separation models in ASC 470-20, Debt—Debt with Conversion and Other Options, for convertible instruments. The ASU updates the guidance on certain embedded conversion features that are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital, such that those features are no longer required to be separated from the host contract. The convertible debt instruments will be accounted for as a single liability measured at amortized cost. This will also result in the interest expense recognized for convertible debt instruments to be typically closer to the coupon interest rate when applying the guidance in Topic 835, Interest. Further, the ASU made amendments to the EPS guidance in Topic 260 for convertible debt instruments, the most significant impact of which is requiring the use of the if-converted method for diluted EPS calculation, and no longer allowing the net share settlement method. The ASU also made revisions to Topic 815-40, which provides guidance on how an entity must determine whether a contract qualifies for a scope exception from derivative accounting. The amendments to Topic 815-40 change the scope of contracts that are recognized as assets or liabilities. The ASU is effective for interim and annual periods beginning after December 15, 2021. Adoption of the ASU can either be on a modified retrospective or full retrospective basis.

On January 1, 2022, the Company adopted the ASU using the modified retrospective method. We recognized a cumulative effect of initially applying the ASU as an adjustment to the January 1, 2022 opening balance of accumulated deficit, an adjustment to the convertible note balance outstanding and the elimination of the derivative liability balance at January 1, 2022.

The prior period consolidated financial statements have not been retrospectively adjusted and continue to be reported under the accounting standards in effect for those periods.

Accordingly, the cumulative effect of the changes made on our January 1, 2022 consolidated balance sheet for the adoption of the ASU was as follows:

	Balance at December 31, 2021			Adjustments from adoption of ASU 2020-06			Adjusted balance at December 31, 2021
Deficit
Accumulated deficit	$	44,103,311		$	(468,462	)	$	43,634,849
Current liabilities
Convertible notes, net of discounts		(4,891,938	)		(47,439	)		(4,939,377)
Derivative liability		(515,901	)		515,901			—

The impact of adoption on our consolidated statements of operations for the year ended December 31, 2022 was to reduce discount amortization by $47,439 and to eliminate any mark-to-market movements on derivative liabilities as the conversion features of convertible notes and warrants no longer qualify as derivative liabilities.