Beneficial Conversion Feature – Goodbye and Good Riddance

Posted by & filed under Debt, Equity-Linked Transactions, Indexed to Own Stock.

With ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), the FASB took the long-overdue step of simplifying its accounting models applicable to convertible instruments. Among the changes is the complete elimination of the beneficial conversion feature (BFC). The… Read more »

Calculating the Constant Yield Using Excel

Posted by & filed under Debt, Derivatives.

I’ve had numerous requests to show how the constant yield rate for debt cost amortization is computed in the sample Excel effective interest method calculations. The idea is pretty simple once you have the formulas set up. The objective is to determine the rate that drives the amortization balance to zero on the maturity date… Read more »

The Effective Interest Rate Method

Posted by & filed under Debt, Equity-Linked Transactions.

The effective interest rate method, or interest method as it is referred to by the FASB in the codification, spreads the total cost of debt over the life of the debt at a constant interest rate. This constant interest rate is also referred to as the constant interest yield. The constant interest rate includes the… Read more »

Conventional Convertible Debt

Posted by & filed under Debt, Equity-Linked Transactions.

Conventional convertible debt is a technical definition. To be considered conventional convertible debt, the holder may only realize the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash determined at the discretion of the issuer. Additionally, the ability… Read more »

GAAP Hierarchy Applicable to Debt

Posted by & filed under Debt.

Accounting Standards Codification (ASC) generally applicable to debt is either missing (because the applicable accounting is ‘generally accepted’), or found in locations other than the primary Codification topic for debt, ASC 470, Debt. Here’s my take on the debt accounting hierarchy from both a practical point of view and as defined in the Codification. This… Read more »