Accounting for convertible securities

The commercial impact of issuing convertibles

Which type of financial instrument is preferred? Sometimes the answer is issuing a security that possesses characteristics of both debt and equity.

The complexity in accounting for convertible securities can have unexpected financial reporting impacts that need to be fully evaluated. For example, embedded derivatives may need to be divided and reported at fair value, with changes in fair value recorded in the income statement each reporting period.

Issuers need to weigh the commercial impact of including certain features within convertible securities against the potential accounting and financial reporting results. Consider these variables in negotiating the specific terms of the instruments your company will issue in the marketplace.

commercial impacts

What difficulties can the embedded features and rights within convertible securities present?

Companies may need to:

  • Determine the appropriate classification (i.e., debt or equity).
  • Assess the potential earnings volatility resulting from embedded derivatives that may require separate accounting.
  • Understand the potential impact on earnings per share.
  • Figure out a mix of other accounting and financial reporting complexities.

What drives accounting and financial reporting complexities?

A combination of embedded rights within “hybrid” securities include:

  • conversion options
  • redemption features
  • mandatory conversion features
  • increasing rate dividends
  • call features
  • price protection features (e.g., down-round provisions)
  • beneficial conversion features
  • make-whole provisions
  • registration rights agreements

How PwC can help

As the accounting for complex debt/equity financing continues to evolve, it is important to keep ahead of the issues. PwC can help you:

  • train personnel to understand the maze of accounting guidance when evaluating convertible securities
  • maintain transparent communication around the key terms being considered and the resulting accounting implications
  • establish procedures to monitor any changes to the guidance in accounting for convertible securities.

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John Vanosdall

Accounting Advisory Services Leader, PwC US

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