Which of the two options do you favor and why?

Option 1: Issuers should account for an instrument with both liability and equity characteristics entirely as a liability, or entirely as an equity instrument, depending on which characteristic governs; or,

Option 2: Issuers should account for an instrument as consisting of a liability component and an equity component that should be accounted for separately.

Develop and explain your argument. In considering this question, you should disregard the current position of the FASB on the issue. Instead, focus on conceptual issues regarding the practicable and theoretically appropriate treatment, unconstrained by US GAAP and IFRS. Also, focus your deliberations on convertible bonds as the instrument with both liability and equity characteristics.