Question: Some financial instruments can be considered compound instruments in that they have features of both debt and equity. The most common example is convertible debt

Some financial instruments can be considered compound instruments in that they have features of both debt and equity. The most common example is convertible debt - bonds or notes convertible by the investor into common stock. A topic of debate for several years has been whether:

View 1: Issuers should account for such instruments entirely as a liability or entirely as an equity instrument depending on which characteristic governs.

View 2: Issuers should account for such instruments by separating the liability and equity components and reporting them separately.

Which view do you favor and why?

Ignore what GAAP says about this issue?

Is convertible debt a liability or is it equity?

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