Let’s say that accounting regulations changed and gave firms a choice about how they could record interest on convertible bonds. You can either:
Record an interest expense that reflects the coupon rate paid (1.25% in Tesla’s case)
Or
Record interest expenses in the way it is currently being done.
If you were the CFO of Tesla, which one would you choose and why? Justify your answer in a couple of sentences
(Hint: there is a “right” answer that I am looking for.)
(Much more detailed hint: the difference between interest that Tesla is recording on its income statement and the interest it is actually paying to its customers is an “accrual” (or non-cash reserve) for interest. Why might Tesla want to record a large accrual for interest expenses, even if it’s not paying out that interest expense as cash? In other words, why might recording interest expense for bonds in this way it is currently done helpful to Tesla?)