GAAP and IFRS

GM: Co-Co Proposal Would Reduce Earnings

''To say the least,'' says chief financial officer John Devine, FASB's proposal ''is very disruptive to us.''
Stephen TaubJuly 23, 2004

Earlier this week the Financial Accounting Standards Board proposed including a certain type of convertible security in dilutive earnings-per-share calculations. The proposal would require that companies treat this relatively new security similarly to traditional convertible securities.

In response, General Motors announced that if the new rules were in effect, it would need to reduce its earnings by $1 per share, or 15 percent, according to the Financial Times. John Devine, the automaker’s chief financial officer, said GM would not have issued the securities — called contingently convertible debt instruments, or “Co-Co” bonds — if it had known the new rules were coming, according to the paper.

“To say the least, this is very disruptive to us,” Devine told the FT. “It has significant ramifications for how investors look at our business. It confuses investors.”

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According to the paper GM is the largest issuer of Co-Co bonds, with over $8 billion outstanding. The top five issuers so far this year are Citigroup, Credit Suisse First Boston, Deutsche Bank, Bank of America, and JP Morgan, reported the FT, citing Thomson Financial.

Altogether, Co-Cos, which were introduced in 2000, are a $124 billion market, the paper added.

Co-Cos, according to FASB’s proposal, are financial instruments that add a contingent feature to a convertible debt instrument. They are generally convertible into common shares after the common stock price has exceed a predetermined threshold for a specified time period — that is, a market-price trigger.

Currently, added the board, most issuers exclude the potential dilutive effect of the conversion feature from diluted earnings per share until the market-price contingency is met. “The issue,” pointed out FASB, “is when the dilutive effect of contingently convertible debt instruments should be included in diluted earnings per share.”

FASB’s proposal, if adopted, would be effective for reporting periods ending after Dec. 15, 2004.

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