How is paid-in-kind interest accounted for? We have a note that accrues interest at a rate of 5% per annum, paid-in-kind until paid in full in cash or converted.
Paid-in-kind interest
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Paid-in-kind interest helps the company conserve cash by delaying interest payments. However, the interest will be added to the then outstanding principal each year until maturity, thereby increasing the amount of interest due to the effects of compounding interest. Each year after the issuance of the note, the interest expense will be impacted by the initial principal amount plus the “rolled-up” interest. Dividends or interest on a convertible instrument that are PIK should also be evaluated for a potential BCF.