Abstract
First, various views of convertible bonds (CBs) are analyzed along with current professional standards of accounting. Present rules are found to be flawed because they do not properly: (1) measure the interest cost of the CB and the total financing cost resulting from the issuance of debt and conversion commitments inherent in the CB; (2) classify the commitments arising from the CB; and (3) account for the conversion of the CB. Based on deductive reasoning and theoretical and empirical evidence, an accounting methodology for CBs is proposed that: (1) recognizes separately the debt and conversion commitments of the CB at date of issuance; (2) recognizes the total financing expense on the CB arising from the interest cost and in the increase in the fair value of the conversion commitment; and (3) accounts for the conversion under the market value method.