FASB releases proposed accounting changes to net-share settlement convertibles, due to take effect January 2008

By Evan Weinberger

New York, Sept. 6 - The Financial Accounting Standards Board released for comments proposed changes to how companies record convertibles with net-share settlement, the group announced Thursday.

The changes will mean that bond issuers will have to separate the par amount of the convertible into separate debt and equity components. The new rules are expected to be adopted in December and would go into effect in the first quarter of 2008.

The deadline for comments is Oct. 15.

Some analysts fear that the changes will stop companies from putting net-share settlements into their convertibles. That, the analysts say, will turn investment-grade companies attracted to net-share settlements off convertibles entirely.

A June 29 report from Lehman Brothers said the changes would lead to an increase in calls as issuers with convertibles with net-share provisions would rush to call before the rules went into effect. Lehman's convertibles analysts said there was likely to be no grandfather clause in the new rules for existing convertibles with net-share settlements.

A July 24 Merrill Lynch report said that the proposed changes to net-share settlement accounting posed a threat to the entire convertibles universe.

Not every analyst was quite as worried about the changes. Several long-term market watchers said investment banks would adjust and find new ways to issue convertibles that will work for all parties.

FASB expects to have a final vote on the proposed changes later in the year.

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