Heads Up on accounting for convertible debt

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16 Sep 2007

We have posted the 7 September 2007 Edition of the Heads Up Newsletter published by Deloitte & Touche LLP (United States).

This issue of Heads Up summarises the impact that proposed FASB Staff Position No. APB 14-a would have on the financial statements of issuers of convertible debt securities. The guidance is proposed to be effective for fiscal years beginning after 15 December 2007 and would be retrospectively applied in prior-period financial statements issued for comparison purposes.

The proposed FSP, titled Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement), would require 'split accounting' on initial recognition, that is, separation of the convertible security into two components:

  • A debt component representing the issuer's contractual obligation to pay principal and interest.
  • An equity component representing the holder's option to convert the debt security into equity of the issuer or an equivalent amount of cash.
This is similar to the IAS 32 requirement, except that IAS 32 applies to issuance of all compound financial instruments whereas FSP APB 14-a would apply only to convertibles that may be cash-settled. It would not affect the accounting for more traditional types of convertible debt securities that cannot be settled in cash upon conversion. Such convertible debt securities would continue, typically, to be accounted for wholly as debt.

Click to view 7 September 2007 Edition of the Heads Up Newsletter (PDF 142k).

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