An entity raising capital by issuing a convertible debt instrument must apply complex financial reporting requirements in U.S. GAAP. To properly account for such an instrument, an entity must consider the following:
Entities often issue convertible debt because it has a lower interest cost than other debt instruments. For example, if an entity is in the growth stage of its life cycle and expects its common stock to increase in fair value, it may issue convertible debt after considering the cost of capital, potential share dilution, and investor demand.
Convertible debt instruments issued to employees for service, to nonemployees for goods or services, or to customers are subject to the accounting guidance for share-based payment arrangements.