Convertible instruments: 5 things you need to know

Aug 22, 2023

Topics discussed include the use of convertible instruments in financing decisions, the impact of new accounting guidance, down round provisions in equity-linked instruments, judgments involved in determining whether to separate the conversion option, and the importance of involving accountants early in accounting for convertible preferred instruments.

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INSIGHT

Convertible Instruments Basics

Convertible instruments combine debt or preferred stock with an embedded equity option, which affects their valuation and financial impact.
Companies pay lower interest or dividends because investors gain potential upside through the conversion option.

INSIGHT

New Accounting Guidance Simplifies

ASU 2020-06 simplified convertible debt accounting into three models, easing prior complexity.
Conversion accounting now avoids P&L impact on conversion, shifting focus solely to equity section changes.

ADVICE

Induced Conversion Accounting Advice

Consult accountants early when planning inducements for debt conversion to carefully analyze accounting implications.
Distinguish induced conversion from extinguishment accounting to correctly recognize P&L effects.

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Every Tuesday in August, Bret Dooley, Deputy Chief Accountant in PwC’s National office, is taking over the podcast to share insights on financial instruments hot topics. In each 25-minute episode, Bret will discuss 5 things you need to know.

In this episode, Bret is joined by Chip Currie, another partner in PwC’s National office with a focus on financial instruments, to discuss convertible instruments and the impacts of updated accounting guidance in this area.

In this episode, you’ll hear discussion of:

1:38 - Why companies use convertible instruments and the complex financial decisions accompanying their use
6:38 - The impact of new accounting guidance for convertible instruments in ASU 2020-06
9:49 - Key information when accounting for induced conversions
12:10 - Down round provisions in equity-linked instruments
19:27 - Judgments involved in determining whether to separate the conversion option and account for it as an embedded derivative

For more information, read chapter 6 of our Financing transactions guide and chapter 3 of our Derivatives and hedging guide. Additionally, check out a prior podcast in this mini series.

Chip Currie is a partner in PwC’s National office with over 25 years of experience assisting companies in resolving complex business and accounting issues. He concentrates on the accounting for financial instruments under both current and emerging standards and works with many of the firm's largest financial services clients and a number of non-financial services clients on treasury-related matters.

Bret Dooley is a Deputy Chief Accountant in PwC’s National office who leads teams focused on the financial services sectors and accounting for financial instruments. He has over 25 years of experience in the financial services, banking, and capital markets industries. Bret focuses on emerging financial reporting issues related to financial instruments, developing interpretive guidance, and assisting clients in resolving complex accounting matters.

Heather Horn is PwC’s National office thought leader, responsible for developing our communications strategy and conveying firm positions on accounting and financial reporting matters. She is the engaging host of PwC’s accounting and reporting weekly podcast and quarterly webcast series. With over 30 years of experience, Heather’s accounting and auditing expertise includes financial instruments and rate-regulated accounting.

Transcripts available upon request for individuals who may need a disability-related accommodation. Please send requests to us_podcast@pwc.com.

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