If-Converted Method (Securities) Definition

Cite this article as:"If-Converted Method (Securities) Definition," in The Business Professor, updated July 29, 2019, last accessed October 20, 2020, https://thebusinessprofessor.com/lesson/if-converted-method-securities-definition/.


If-Converted Method Definition

A security that can be changed to another security is a convertible security, preferred stocks and bonds are the most common examples of convertible securities. The If-Converted Method is used in estimating the value of new shares that convertible securities are changed into. This means the changes in the amount of outstanding shares when a convertible security is changed to shares are calculated using the if-converted method.

In most cases, if the conversion of convertible securities is done when the stock price is more than the exercise price, the if-converted method becomes more essential.

A Little More on What is an If-Converted Method

Preferred shares or bonds have one intrinsic nature and this is their ability to be converted into new shares, which is why they are the common forms of convertible securities. Convertible securities are more appealing to investors than many other forms of securities, this is owing to the fact that the direction of the market grants more flexibility and profit to investors.

Bond issuers often offer convertible securities with the agreement that the number of shares that an investor is entitled to during the conversion would be determined by the security’s conversion ratio. The bond issuer can determine the conversion rate, this can be fixed or can change depending on the direction of the market.

Recent Example of the If-Converted Method

The if-converted method has been used over time by investors who want to calculate the value of convertible securities they invest in as at the time they are converted into new shares in the market. There are many instances where the if-converted method has been used. The most recent one was in 2018 when the method was used by Stericycle to measure the dilution of convertible securities.

Through this method, Stericycle was able to account for the value of change in outstanding shares when its convertible securities were changed to new shares. The if-converted method is also important for companies that have invested in convertible securities, especially when compiling financial statements.

References for “If-Converted Method


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