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If-Converted Method

What is 'If-Converted Method'

A method used to calculate the share impact of convertible securities if they were converted into new shares. Only in-the-money convertible securities (securities where the stock price is above the exercise price) are considered in the if-converted method.

This method assumes that convertible securities are converted at the beginning of the fiscal period or at the time of issuance, whichever is later. The number of new shares is calculated on the basis of the convertible securities' conversion ratio.

Explaining 'If-Converted Method'

Convertible debt that is converted into stock increases share dilution but reduces interest expense, which is a tax-deductible expense for a company. For example, a company with a $20 million convertible debenture carrying an interest rate of 5% would incur an annual interest expense of $1 million. The if-converted method takes this into account by adding after-tax interest savings arising from the conversion to earnings per share (EPS), which offsets the dilution caused by the new shares.


Further Reading


The Pricing of Mismeasured EPS
papers.ssrn.com [PDF]
… Accounting attempts to measure dilution of future earnings through two methods … Empirically, I am unable to model these interactive effects in determining the economic conversion likelihood. Additionally, the if-converted method's treatment of each individual instrument …

The economic dilution of employee stock options: Diluted EPS for valuation and financial reportingThe economic dilution of employee stock options: Diluted EPS for valuation and financial reporting
meridian.allenpress.com [PDF]
… Accounting attempts to measure dilution of future earnings through two methods … Empirically, I am unable to model these interactive effects in determining the economic conversion likelihood. Additionally, the if-converted method's treatment of each individual instrument …

Economic consequences of financial reporting changes: diluted EPS and contingent convertible securitiesEconomic consequences of financial reporting changes: diluted EPS and contingent convertible securities
link.springer.com [PDF]
… Accounting attempts to measure dilution of future earnings through two methods … Empirically, I am unable to model these interactive effects in determining the economic conversion likelihood. Additionally, the if-converted method's treatment of each individual instrument …

Assessing the role of financial deepening in business cycles: the experience of the United Arab EmiratesAssessing the role of financial deepening in business cycles: the experience of the United Arab Emirates
www.tandfonline.com [PDF]
… Accounting attempts to measure dilution of future earnings through two methods … Empirically, I am unable to model these interactive effects in determining the economic conversion likelihood. Additionally, the if-converted method's treatment of each individual instrument …

A theoretical and empirical study of computing earnings per shareA theoretical and empirical study of computing earnings per share
drum.lib.umd.edu [PDF]
… Accounting attempts to measure dilution of future earnings through two methods … Empirically, I am unable to model these interactive effects in determining the economic conversion likelihood. Additionally, the if-converted method's treatment of each individual instrument …

Investment and financing activity following calls of convertible bondsInvestment and financing activity following calls of convertible bonds
www.sciencedirect.com [PDF]
… Accounting attempts to measure dilution of future earnings through two methods … Empirically, I am unable to model these interactive effects in determining the economic conversion likelihood. Additionally, the if-converted method's treatment of each individual instrument …



Q&A About If-Converted Method


Is there any other way to calculate fair value of convertible bonds besides using this method?

There are other methods that can be used such as Market Approach, Income Approach, and Cost Approach. These approaches are similar in nature but they each have their own unique characteristics that make them different from one another. For example, when using Market Approach you look at recent transactions in order to find comparable prices of similar securities; however, when using Cost Approach you look at historical costs associated with issuing convertible bonds in order to find an appropriate cost basis for your current situation.

What does If-Converted Method stand for?

IF stands for "If Converted".

How do you use the If-Converted Method?

You use it by calculating the conversion ratio and then multiplying it with the market price of common stock.

What is the If-Converted Method?

The If-Converted Method is a method used to calculate the fair value of convertible bonds.

How does this affect dilution and interest expense?

Convertible debt that is converted into stock increases share dilution but reduces interest expense, which is a tax-deductible expense for a company. For example, a company with a 2 million convertible debenture carrying an interest rate of 5 would incur an annual interest expense of 1 million. The if-converted method takes this into account by adding after-tax interest savings arising from the conversion to earnings per share (EPS), which offsets the dilution caused by the new shares.

What is the if-converted method?

The if-converted method is used to calculate the share impact of convertible securities if they were converted into new shares.

What are some examples of how you can use this method?

Some examples include using it to determine whether or not a company's bond will be converted into common stock, and determining if a bond should be classified as debt or equity on a company's balance sheet.

What does this method assume?

This method assumes that convertible securities are converted at the beginning of the fiscal period or at the time of issuance, whichever is later.

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