Cima F2 Exam Question No 63

Question No 63:

What is Convertible debt?

The principles of convertible bonds and convertible preference shares are similar and will be dealt with together. If the convertible bonds/preference shares had been converted:

• The interest/dividend would be saved therefore earnings would be higher
• The number of shares would increase.

Note: Interest on bonds is tax deductible however preference dividends do not attract tax relief. Therefore, the interest adjustment should only be reflected net of tax in the case of bonds.
Note: If there is an option to convert the debt into a variable number of ordinary shares depending on when conversion takes place, the maximum possible number of additional shares is used in the calculation.