And that's reflected in an unarmortized premium, so you could have a gain on that.
However, if you include a sweetener in that situation,
the gain could actually flip from the premium and become a loss.
It's probably a more realstic situation, but
you can't assume that just because there was a premium that is going to be gained
in redemption you have to look at what the features are.
It could end up being in loss,
if there is compensation to the investors for the early redemption.
All right,
we previously talked about conversion features where you would convert debt to
stock based upon a conversion feature that's embedded within the stock.
What if there wasn't a conversion feature, nothing embedded within the stock?
But the company makes an offer to the bond holders
To convert by redeeming the debt with common stock.
It's the economic equivalent of a conversion, but
now instead of being a conversion, what I'm going to do,
is I'm going to offer you stock with a fair value of
a certain price in exchange for your bonds.
This is a non cash transaction.
So the reacquisition price now is going to be determined
from the value of common or sometimes preferred stock issued or
the value of the debt whichever's more clearly evident.
Privately held company stock may not be readily valuable,
it may not be easy to determine their value,
at least at the time when this standard was written.
Today, I think we would be more inclined to think that with modern
valuation models, it is possible to value most stock.
So this may be a little bit out of date as an accounting standard, but
this is still what's in there.
You're going to either take the value of the stock or preferred stock or
the value of the debt, whichever is more clearly evident.
If you're issuing preferred stock,
it may actually be the debt that has a fair value that's more of an in.
So here's a small example, suppose the issuer offer the bond holders
stock worth 10,500,000 in exchange for bonds of 10 million.
Now no cash will change hands,
it's not the exercise of an option that was included in the original issue.
It's a new transaction, so the accounting is different from a conversion.
How are we account for this like any other non cash transaction, so
I'm going to issue the capital stock and record that at its fair value,
which we assumed was 10,500,000.
I'm going to have the debt relieved at its face amount and
the discount will go away of 94,000.
And I'll take the difference between those and now its a loss of redemption.
Notice the difference now, when it was a conversion feature,
there was no gain or loss.
When it's a non cash transaction, when there was no option built into the bonds.
But I offer you stock in exchange for your debt, there is a gain loss,
that's the difference.