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Unformatted text preview: ebts, and the conversion option is an equity Convertible debt example Convertible debt example Source: Air Canada 2005 Annual Report Question: Debt or Equity? Answer: Debt & Equity—Only the interests are debts, but the principal and conversion option are equities Convertible Debt – Accounting Issues • The reporting of convertible debt and the The conversion feature result in three issues: conversion 1. 2. 3. Reporting at the time of issuance Reporting time Reporting at the time of conversion Reporting time Reporting at the time of retirement Reporting time Reporting at the Time of Issuance • On issue date, part of the proceeds are allocated On to liability and part to equity to • This reflects the nature of the security—since a This convertible debt is part liability and part equity convertible • The amounts allocated to liability and equity are The determined by using either: determined – The Incremental Method / Residual Value Method – The Proportional Method / Relative Fair Value The Method Method Incremental Method Incremental Method • Only one component (debt or equity) is Only valued...
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