4.4 Subsequent Accounting

If the issuer has elected to apply the fair value option, it remeasures the convertible debt instrument at its fair value on each reporting date and reflects (1) the qualifying changes in fair value in earnings and (2) the portion of the changes that is attributable to a change in instrument-specific credit risk in other comprehensive income. If the issuer has not made such an election, the convertible debt is accounted for at amortized cost in accordance with the interest method described in ASC 835-30. (Reported interest expense on convertible debt to which ASC 470-20-25-12 applies is generally lower than on similar nonconvertible debt, since the issuer is “paying” for the low interest rate by providing an equity conversion feature that is not recognized for accounting purposes.)

In accordance with ASC 835-30-35-2, under the interest method, the amortization of a discount or premium is computed “in such a way as to result in a constant rate of interest when applied to the amount outstanding at the beginning of any given period.” When nonputtable convertible debt is accounted for at amortized cost, any debt discounts and issuance costs are generally amortized over the contractual term to maturity. In practice, debt discounts and issuance costs on convertible debt that is puttable by the investor are amortized from the date of issuance to the earliest noncontingent put date rather than to the contractual maturity date. However, any debt premium is amortized over the debt’s contractual life because recognizing the debt premium as a reduction of interest expense would be analogous to recognizing a gain contingency. Under ASC 470-10-35-1 and 35-2, if debt instruments have “a maturity date that can be extended at the option of the borrower [at an increasing interest rate] at each maturity date until final maturity,” debt discounts and issuance costs are amortized over the estimated outstanding term of the debt.