Co-Cos

One item that has been creating a large number of restatements lately is "contingently convertible debentures" or Co-Cos. Co-Cos are a special type of convertible debt instrument that is convertible at the option of the holder into shares of common stock once the common stock trades above a certain price for a specified period of time (a market price trigger).

The Emerging Issues Task Force Issued "The Effect of Contingently Convertible Debt on Diluted Earnings per Share" ("EITF 04-08"). This new accounting rule requires companies with contingently convertible debt instruments to include the dilutive effect of the contingently convertible debt in diluted earnings per share calculations regardless of whether the market price trigger has been met. The rule requires retroactive application.

The rule basically requires that Co-Cos be treated like traditional convertible debt. One important question for students is why were Co-Cos created?

Actuant Corporation recently released a press release about its restatement of net income as a result of issuing contingently convertible debt, a small bit:

The impact of adopting the new accounting rule is a reduction in diluted earnings per share, but not net earnings. The quarterly restatement of diluted earnings per share for fiscal 2004 and 2005 is reported on the attachment to this press release. In calculating diluted earnings per share under the new rules, Actuant is required to add back the net of tax charges for interest expense and debt issuance cost amortization related to the 2% Co-Cos to net income (restated numerator) and increase the weighted average outstanding shares for the shares issuable under the 2% Co-Cos (restated denominator).