6.1 Background
This chapter, which supplements the discussion in Chapters 3 and 4, addresses considerations related to basic
and diluted EPS that apply to convertible debt instruments, including those with
embedded put and call options. In this chapter, it is assumed that the debt
instrument was not issued in a share-based payment arrangement.
As discussed in Section 4.4.1, ASC 260-10-20 defines a convertible security as “[a] security that is convertible into another security based on a conversion rate.” By definition, a convertible security may be converted into common shares or other securities of the issuer. This chapter only discusses convertible securities classified as liabilities that are convertible into the issuer’s common shares (also referred to as “convertible debt instruments”).
Convertible debt instruments that are discussed in this chapter include:
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Convertible debt that must be settled in common stock (Section 6.2).
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Convertible debt that may be settled in cash or common stock (Section 6.3).
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Mandatorily convertible debt (Section 6.4).
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Stock-settled debt (Section 6.5).
Other considerations that may be relevant to convertible debt instruments are discussed in Section 6.6. See also Section 4.4.3 for the implications related to diluted EPS when a debt instrument is only contingently convertible.
For a comprehensive discussion of the issuer’s accounting for convertible debt
instruments, see Section
7.6 of Deloitte’s Roadmap Issuer’s Accounting for Debt.