bafnotrad

Priceline: More Headwinds Ahead

I think the best reason to be short Priceline is the change required when accounting for convertible debt. It is all there in the 10Q, and it seems to be ignored by everyone.

The Financial Accounting Standards Board issued an accounting rule change that will significantly impact the accounting for our convertible debt.



The Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. APB 14-a, “Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-a”). FSP APB 14-a requires cash settled convertible debt, such as our $520 million aggregate principal amount of convertible senior notes that are currently outstanding, to be separated into debt and equity components at issuance and a value to be assigned to each. The value assigned to the debt component would be the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the bond cash proceeds and this estimated fair value, representing the value assigned to the equity component, would be recorded as a debt discount and amortized to interest expense over the life of the bond. In addition, if our convertible debt is redeemed or converted prior to maturity and the fair value of the debt component immediately prior to extinguishment exceeds the carrying value it will result in a loss on extinguishment. Although FSP APB 14-a will have no impact on our actual past or future cash flows, it will require us to record a significant amount of non-cash interest expense as the debt discount is amortized and may result in losses on extinguishment that would not have occurred under previous GAAP. FSP APB 14-a is effective for financial statements issued for fiscal years beginning after December 15, 2008. We are in the process of evaluating the impact of this new standard, but expect that it will have a material adverse impact on our results of operations and earnings per share.