The reporting requirements for convertible bonds is a bit complicated. Convertible bonds have a debt and an equity element so when a company issues convertible bonds, they need to work out each element and report them separately (as debt and as equity). First of all, the companies need to work out the value at which the conversion will be made and whether the conversion will be made. Then they need to find the rate for a similar bond that does not offer conversion.
The next step is work out the coupon repayments and the redemption value( the conversion value) and discounting them with the interest rate for the similar bond that does not offer conversion. The difference between the NPV of the above calculation and the market value (the price that the investor paid) is the equity element.
A simple example is as follows:
Lets say that company A issued a convertible bond of $500,000 offering with coupon rate of 5%. Similar bonds without the conversion offer 7%. The bond expired in 2 years and the bond holders will have the option to convert the bond into 250 shares of $1 each (which is lower than the redemption value so we will use the redemption value)
Period 1: 500,000*0.05=25,000 * (1/1.07) = 23,364
Period 2: 500,000*0.05=25,000 * (1/1.07^2)= 21,836
Period 2: 500,000 * (1/1.07^2)= 436,719.
Total PV of the Above= $481,919
The equity part is 500,000-481,919=18,081