How does a convertible bond issued by Fiat Chrysler Automobile affect the company’s balance sheet?

FCA logo

Source: Wikipedia

Fiat Chrysler Automobiles (FCA) launched a $2.5 billion convertible bond issue in December 2014.  FCA will be using the funds generated from the bond issue to help to turn its Jeep, Maserati, and Alfa Romeo brands into global brands, competing directly against Volkswagen and BMW in the premium car market.

The bond issue will mature in 2016 and will pay annual interest (an “annual coupon”).  The bond will have a conversion feature that allows it to be converted into shares; an investor would presumably exercise the conversion right if the market price of FCA rises to an appropriate level at some future date.  If the market price does not increase suitably, then the bondholder would simply hold the bond without converting it into FCA stock.

Questions

  1. Is the convertible bond accounted for as liability or as equity by FCA? Why?
  2. How will the convertible bond issue affect FCA’s assets, liabilities, and equity?
  3. Assume that investors opt to convert the bond into stock in late 2015. How will that conversion affect FCA’s assets, liabilities, and equity?

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions.

  • Student handout (pdf) (word) (contains entire blog posting + discussion questions)
  • PowerPoint file (brief article overview + discussion questions)

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 3.0 Unported License.

About Dr. Wendy Tietz, CPA, CMA, CGMA

Dr. Wendy Tietz is a professor of accounting at Kent State University in Kent, Ohio, USA. She is also a textbook author with Pearson Prentice-Hall.

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