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    Chapter 16 Dilutive Securities and Earningsper Sha

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    Satrio seno Sancoko
    Convertible bonds can be converted into shares of stock for a period of time after issuance. They provide the benefits of bonds and stock options to investors. Companies issue convertible bonds to raise capital without giving up as much ownership control as common stock. When bonds are converted, companies use the book value method and do not recognize gains or losses. Convertible preferred stock is considered equity and is also converted using the book value method without recognizing gains or losses. Stock warrants allocate proceeds from securities between debt and warrants based on fair value, using methods like proportional or incremental.

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    Chapter 16 Dilutive Securities and Earningsper Sha

    Uploaded by

    Satrio seno Sancoko
    39 views2 pages
    Convertible bonds can be converted into shares of stock for a period of time after issuance. They provide the benefits of bonds and stock options to investors. Companies issue convertible bonds to raise capital without giving up as much ownership control as common stock. When bonds are converted, companies use the book value method and do not recognize gains or losses. Convertible preferred stock is considered equity and is also converted using the book value method without recognizing gains or losses. Stock warrants allocate proceeds from securities between debt and warrants based on fair value, using methods like proportional or incremental.

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    CHAPTER 16 DILUTIVE SECURITIES AND EARNINGSPER SHA

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    Convertible bonds can be converted into shares of stock for a period of time after issuance. They provide the benefits of bonds and stock options to investors. Companies issue convertible bonds to raise capital without giving up as much ownership control as common stock. When bonds are converted, companies use the book value method and do not recognize gains or losses. Convertible preferred stock is considered equity and is also converted using the book value method without recognizing gains or losses. Stock warrants allocate proceeds from securities between debt and warrants based on fair value, using methods like proportional or incremental.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    39 views2 pages

    Chapter 16 Dilutive Securities and Earningsper Sha

    Uploaded by

    Satrio seno Sancoko
    Convertible bonds can be converted into shares of stock for a period of time after issuance. They provide the benefits of bonds and stock options to investors. Companies issue convertible bonds to raise capital without giving up as much ownership control as common stock. When bonds are converted, companies use the book value method and do not recognize gains or losses. Convertible preferred stock is considered equity and is also converted using the book value method without recognizing gains or losses. Stock warrants allocate proceeds from securities between debt and warrants based on fair value, using methods like proportional or incremental.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
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    CHAPTER 16 DILUTIVE SECURITIES

    AND EARNINGSPER SHARE
    Accounts Payable and Equity
    Much of the controversy related to accounting for financial instruments such as stock
    options, convertible bonds, and shared preferences relates to whether a company
    should report it as a liability or as an equity. Dividend declaration is at the issuer's
    discretion, as is the decision to buy back shares.

    Convertible debt
    Convertible bonds can be converted into other corporate bonds for a certain period of
    time after issuance. Convertible bonds combine the benefits of the bond with
    exchange privileges for shares in holder options. The investor who buys it wants the
    security of holding the bond plus an additional conversion option if the stock
    appreciates significantly
    The two main reasons companies convert:
    - The desire to raise capital without giving up more ownership control than necessary.
    - Obtain common stock financing at a lower price.

    At the Time of Publishing


    Convertible bonds are recorded as straight debt issues, with a discount or premium
    being amortized over the term of the debt.

    On Time Conversion
    Companies use the book value method when converting bonds.
    When debt holders convert debt into shares, the issuing company does not recognize a
    gain or loss at the time of conversion.

    Induced Convertion
    - Issuers want to drive fast conversions.
    - Issuers offer additional considerations, which are called "sweeteners."
    - Period load sweetener.

    Convertible Debt Pension


    Recognized the same as non-converted debt pension.
    The difference between the cost and the carrying value should be reported as gain or
    loss in the income statement.

    Convertible preferred stock includes an option for the holder to convert the preferred
    stock into a fixed number of ordinary shares. Convertible preferred stock is
    considered part of equity.
    No gain or loss is recognized when converted, using the book value method.

    In the Certificate entitled the holder to buy shares at a certain price within the stated
    period.
    Usually arises for reasons:
    - To make security more attractive
    - As proof of preemptive rights
    - As compensation to employees
    Stock Warranty
    Circulation of warrant stock:
    - The results are allocated between two securities.
    - Allocation based on fair market value.
    Two allocation methods:
    (1) proportional method and
    (2) additional methods

    Proportional method

    Specify:
    - the value of the bonds without a warrant, and
    - warrant value.
    The proportional method of allocating funds uses a proportion of two amounts, based
    on fair value.

    Incremental Method

    - If a company cannot determine the fair value of either warrants or bonds.


    - Use a security whose fair value can be determined.
    - Allocate the remaining purchase price against security that does not know fair value.

    Split warrants involve two securities,


    - debt security,
    - a warrant to purchase common stock.
    - Nondetachable warrants
    - there is an allocation of proceeds between bonds and warrants,
    - the company records all proceeds as debt.

    The right to subscribe to additional shares, terms


    - Exchange Rights - existing shareholders have the right (privilege preemptive) to
    purchase new shares issued in proportion to their ownership.
    - Prices are usually less than current market value.
    - The company only makes memorandum entries.

    Under the fair-value method, firms use an acceptable choice-price model to value
    options on the grant date.

    Two major accounting problems:


    1. How to determine compensation expense.
    2. Over what period to allocate compensation costs.

    Load determines
    Compensation expense is based on the fair value of the expected option vest on the
    date of granting the option to the employee (s) (ie, date of grant).

    Allocating Compensation Expense


    During the period during which the employee performs-service period.

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