In short
Convertible bonds are debt that the holder can exchange for a set number of the issuer's common shares. Under current US Generally Accepted Accounting Principles (GAAP), most are recorded entirely as a liability, with no separate equity component.
Key takeaways
- On conversion under the book value method, the bonds' carrying amount becomes equity with no gain or loss.
- Diluted earnings per share uses the if-converted method: add back after-tax interest and add the shares.
- A conversion feature is separated only in specific cases, such as when it must be bifurcated as a derivative.
Where it's tested
FAR: Long-Term Debt (Bonds & Notes) — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Convertible bonds with no separately accounted-for conversion feature are converted into common stock. Using the book value method, how is the conversion recorded?