How to Account for Convertible Debt (U.S. GAAP)

Convertible debt is debt that can be converted into other securities, such as common stock. Investors prefer convertible debt when they want regular cash flows (from the interest) but the chance to obtain equity if the company's value increases significantly. The borrower benefits by (1) getting a lower interest rate on the debt and (2) not having to give up as many shares of equity (had the company raised the money with an equity issuance).

Under U.S. GAAP, convertible debt is typically treated as a liability by the borrower.
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