Accounting for convertible bonds

Various views of convertible bonds (CB) are analyzed, along with current professional standards of accounting. Present rules are found to be flawed because they do not properly measure the interest cost of the CB and the total financing cost resulting from the issuance of debt and conversion commitm...

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Bibliographic Details
Published in:Journal of applied business research 1994-10, Vol.10 (4), p.130
Main Authors: Stevens, William T, Volkan, Ara G, Baker, Paul D
Format: Article
Language:English
Subjects:
Accounting procedures
Accounting standards
Book value
Compensation plans
Conversion
Convertible bonds
Equity
Financial accounting standards
Financial instruments
Financial reporting
Financial statements
Interest costs
Liability
Loss recognition
Original issue discount
Professional standards
Stock offerings
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Summary:Various views of convertible bonds (CB) are analyzed, along with current professional standards of accounting. Present rules are found to be flawed because they do not properly measure the interest cost of the CB and the total financing cost resulting from the issuance of debt and conversion commitments inherent in the CB, classify the commitments arising from the CB, or account for the conversion of the CB. Based on deductive reasoning and theoretical and empirical evidence, an accounting methodology for CBs is proposed that: 1. recognizes separately the debt and conversion commitments of the CB at the date of issuance, 2. recognizes the total financing expense on the CB arising from the interest cost and in the increases in the fair value of the conversion commitment, and 3. accounts for the conversion under the market value method.
ISSN:0892-7626
2157-8834