San Diego State University Accounting Response Discussion

1. The difference between accounting for proceeds from the insurance of convertible bonds and of debt instruments with separate warrants to purchase stock is that the former is accounted for much like nonconvertible bonds. Convertible bonds are treated as one security, whereas debt instruments with separate warrants are treated as two securities; a bond and a warrant. 2. The alternative accounting method decreases the amount of liability reported and would allow the value of the conversion option and debt value to be recorded in separate accounts; shareholders’ equity account and bond account, respectively. Though it may be a hassle to record for two separate accounts, doing so may better represent the numbers because it shows the the true value of the conversion options and therefore, may attract more investors. 3. Currently, the existing accounting treatment is to record convertible bonds the same way you would nonconvertible bonds. The rationale is that it makes it easier to track and measure one value instead of two, therefore making it less difficult to account for. I don’t agree with this because if you could reduce liability by adding an equity account, it should be done because it’s already an accountant’s job to track the numbers and doing so would be more accurate. I think we should should follow IFRS standards when it comes to accounting for convertible bonds; which is to have two separate accounts.

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