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Convertible bonds can be a difficult financialExperience Tradition/tutorialoutledotcom

FOR MORE CLASSES VISIT www.tutorialoutlet.com Convertible bonds can be a difficult financial tool to appropriately label for accountants. If someone favors recording convertible bonds entirely as a liability despite the fact that they can easily be converted to stock, thus making them equity. I understand that this makes it difficult to distinguish a convertible bond from nonconvertible bond; but they are still a liability until they are converted. One of the problems with option 2 is that there is no way of determining whether the bond will be converted by the holder of the bond. There isn't an available mathematical formula to compute the likelihood that a bond holder will convert. This question reminds me of studying intangible assets in that it is difficult for a company to place a value on something like an internally developed intangible asset. Because all you are doing is accounting for the expenses attributed to developing the asset, the recorded value is often wildly different than the actual value to the company. This is another example of the importance of including this information in the notes.

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