By Cydney Posner

Rumor has it that issuing convertible debt has once again become a very attractive method of raising capital. If your clients are pursuing that avenue, you may be interested in the excerpt below from this morning's Corporate Counsel, which highlights a new FASB staff position applicable to converts;

"Companies considering a convertible debt issuance or that have convertibles already on their books should take look at the new FASB Staff Position (FSP) No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)." This new position will be effective for fiscal years (and interim periods) beginning after December 15, 2008, and is to be applied retrospectively to all past periods presented –even in those situations where the convertible instrument has matured, converted or has otherwise been extinguished as of the effective date of the FSP.

"The FSP will likely have a big impact on the financial statements of companies that have issued the relatively popular flavor of convertible debt securities that, upon conversion, may be settled by the company fully or partially in cash. While today most types of convertible debt instruments are treated as debt securities for accounting purposes, under the new FSP companies will need to allocate between the liability and equity components of the instrument. Splitting up the debt and equity components will inevitably result in a debt discount, which will need to be amortized to interest expense over the expected life of the debt. As a result of the FSP, companies that have issued cash-settled convertible securities will see an increase in interest expense associated with those instruments (and a resulting reduction in earnings and earnings per share), with a decrease in the net carrying amount of debt on the balance sheet along with an increase in the amount of equity."

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