So let's take a look at the derivative separation accounting under US gaap.

So this is where the derivative in the convertible meets the derivative accounting criteria.

So what are the requirements for the accounting treatment? Firstly, the economic characteristics of the option are not directly or economically related to the characteristics of the host contract.

Now, because the option is conversion to equity and host contract in this case is a bond that often is met by convertible bond treatment.

The instrument is not measured at fair value 'cause obviously that would, should be one line on the income statement.

And the separate instrument with the same terms as a convertible option would be treated as a derivative.

There are a few things to note here.

Um, in convertible debt, as I mentioned, typically the host is a bond and the equity conversion, because it's converts to equity, is separate. It's not closely related to the bond.

So often convertibles do meet that criteria, but there's another issue which is important.

The derivative needs to be readily convertible to cash on settlement.

So this typically means that the convertible, the the con conversion into shares need to be actively traded. So this, the conversion into the instrument that you get needs to be something that it will be actively traded. So this often means that if it's a private business, it may not meet this criteria.

And this is one of key difference between US GAAP and IRS, whether the derivative can be separated out or not.

And IRS it always is under US gaap.

It may or may not be.

So let's take a look at the accounting.

So the first thing we do is we record the derivative as a financial liability at fair value.

So we measure the value of the derivative, and any further changes in that fair value will be reflected through the income statement. So if, for example, the co convertible becomes in the money, you will see the derivative liability increase and a loss running through the income statement, which obviously makes it less attractive as a funding instrument.

Other potential options which maybe need to be separated.

So under this accounting, you don't, don't just have to separate out the option for conversion. There may be other options you need to record separately as well.

For example, the contingent conversions.

So for example, cocoa bonds, um, a fundamental change, e, e change, EGF, change of control conversion into a subsidiary stock rather than holding company stock and also convertible into a variable number of shares.

So there may not just be one option that needs to be recorded.

There may be other options related to the contract that could be recorded as well.

So that's something just worth watching out for.