Convertible debt typically represents bonds issued by a company that may eventually be converted into stock by the bondholder. Convertible debt accounting is the process by which a company records the transactions related to every step of this process. Proper accounting is necessary to ensure a company accurately reflects the movement and alterations to a company’s value during this process. The best tips for convertible debt accounting include maintaining accurate records and recording proper initial transactions, disclosing the amounts and reasons for convertible debt, and following all applicable laws and regulations. These steps should help a company maintain its accuracy and integrity in the marketplace.
A publicly held company is perhaps the most common entity that issues convertible bonds, though closely held organizations may also do so. With convertible debt accounting, the company must create specific records that detail the use of convertible bonds with investors. Accountants must handle this information appropriately as other invested stakeholders are certainly interested in the convertible debt. Accurate, valid, and relevant information recorded at the time of bond issuance is also important. This information must be accurate for all parties involved, including external auditors who will no doubt review the transaction at a later time.
Financial disclosures are small statements made on a company’s financial statements that detail certain items on the statements. Convertible debt accounting may need disclosures to outline the use of convertible debt and how a company will use the proceeds. For example, a company may issue convertible debt in order to start new operations, such as purchasing equipment and placing it in operational use. The conversion date of the bonds and type of stock replacing the debt are also important notes. Other notes and disclosures may be necessary to properly inform all stakeholders about the company’s current and future financial position in the market environment.
Many different types of external laws and regulations exist for companies that issue bonds, stocks, and convertible debt in a marketplace. Failure to follow all of the applicable laws can result in fines or legal charges against a company. When this occurs, a company’s reputation can be severely tarnished with consumers and other companies. Government agencies may also restrict a company from future financial activities that involve debt or other forms of convertible debt accounting practices. Stockholders, for example, may create problems with external agencies if the stockholders begin detailing inappropriate actions by the company.