July 28, 2004

Developments on Contingent Convertible Bond

The FASB has released a draft abstract of a Tentative Conclusion of the Emerging Issues Task Force (EITF) that contingently convertible bonds should be included in calculating diluted earnings per share regardless of whether the contingent feature has been met.

As an example of contingently convertible debt, the debt might provide that it is not convertible into common shares until the stock price has exceeded some percentage threshold for some specified time period (e.g., 20% above the conversion price for a 30-day period). Presently, most issuers exclude the potential dilutive effect until the market price contingency is met. The FASB staff has reported that more than $100 billion in contingently convertible debt has been issued, with more than $90 billion currently outstanding.

In addition to contingently convertible debt, the Task Force is inviting comments on whether other instruments with similar contingencies should be included. Comments are due on September 3, 2004. If the Task Force reaches a decision, this guidance will require FASB Board ratification before it becomes effective.

The proposed effective date would be reporting periods ending after December 15, 2004, and prior period EPS amounts presented for comparative purposes would have to be restated. Thanks to roving reporter Mike Holliday for this heads-up!

Calling All Accountants!

According to a GAO report issued yesterday, the SEC faces ongoing challenges filling many of its newly created positions, particularly accountants, due to competition from the private sector. In 2004, Corp Fin received funding for 175 new accountants and attorneys, but Corp Fin had filled only about 30% of its vacancies through the first half of the year.

The report also noted that in 2003, Corp Fin reviewed only 23% of all reporting issuers, falling short of its goal of 33% (mandated by SOX Section 408). Ultimately, the report made no recommendations.