About four years ago, contingently convertible bonds - or "CoCos" - were enormously popular because they hardly affected the issuer’s earnings per share calculations. Bearing slim coupons, they had the added benefit of rarely increasing the EPS denominator share count - at least, until the FASB’s Emerging Issues Task Force reached a consensus that such hybrid instruments should be treated as "if-converted" for purposes of EPS calculations, regardless of any contingencies needing fulfillment. That left a less popular convertible bond, known in accounting circles as "Instrument C,"as the best bet of companies trying to raise capital without affecting earnings or share count. These convertibles are low-coupon issues, and because only a portion of the convertible feature is handled on a treasury stock basis, there’s practically no effect on earnings per share for the issuer.

Money for nothing; interest for free. "I want my Instrument C!" became the rallying cry of corporate treasurers, after "CoCo bonds" became unattractive in 2004. Yet Instrument C is also a gimmicky creation designed to fall into the cracks created by a patchwork of accounting standards relating to earnings per share and convertible securities. The Emerging Issues Task Force tried unsuccessfully to improve the accounting for Instrument Cs in early 2007; failing to do so, the FASB itself took up the effort afterwards. Their solution for improving the accounting for Instrument Cs would be easily applied by issuers - and would have the effect of increasing interest expense and lowering earnings per share, all on a retrospective basis, to boot. Expect corporate resistance to their proposal - particularly from Wall Street firms that underwrite these things.