FASB Begins Balloting on Final Guidance for Cash Settleable Convertible Instruments
April 21, 2008
On April 10, 2008, the Financial Accounting Standards Board (FASB) posted the results from its recent meeting on APB 14-a, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (including Partial Cash Settlement). At the meeting, FASB announced that it would proceed to voting on the issuance of final guidance on the controversial accounting issue that will require issuers of cash settleable convertible debt to record additional interest expense.
The proposed guidance, issued August 31, 2007, has been controversial because it will increase, in most cases significantly, an issuer’s interest expense and is required to be retroactively applied. FASB said the proposal garnered 57 respondents, of which 46 opposed its issuance. Each of the four major accounting firms filed comments in support of the proposed guidance. According to FASB, opponents of the proposal asserted that the current accounting treatment for such instruments is correct and that a requirement to separate the liability and equity components of convertible debt instruments will increase complexity in financial reporting and would understate issuers’ liability balances because it would result in a measurement of the liability component that is less than the related claim in bankruptcy.
If adopted, for fiscal years beginning after December 15,2008, and interim periods within those fiscal years, an entity will be required to report interest expense at the same rate it would have reported had it just issued nonconvertible debt. Historically, companies issuing convertible debt instruments were typically only required to record interest expense based on the contractual interest coupon. Under the proposed changes issuers will be required to record a market rate of interest based on their credit standing. However, FASB said that at issuance, entities would be required to book a deferred tax liability, which would then be reversed as a tax benefit as the debt discount is amortized – somewhat mitigating the impact of the additional interest expense.
FASB expects that the balloting process will be completed and the final guidance will be issued in May 2008.
http://www.fasb.org/project/convertible_debt_instruments.shtml#decisions