What is the accounting for debt or equity securities that are convertible into common stock?
Conversion rights must be carefully analyzed for accounting purposes. In some cases, these features represent embedded derivatives, which must be separately accounted for at fair value. In other situations, the conversion feature may be considered “beneficial.” Beneficial conversion features typically result in higher interest or dividend charges over the life of the instrument. Of course, instruments that are convertible into shares of common stock may result in lower earnings per share, as reported on a diluted basis. What if, after issuing debt, its terms are amended or modified? Any amendment to an existing financing arrangement will have accounting consequences. In some situations, the amendments are so substantial that the modified debt instrument is deemed to be extinguished for accounting purposes and “replaced” by a new arrangement. This results in a debt extinguishment gain or loss recognized in the income statement, which includes the write-off of any previously recognized,
