Financial Accounting

FASB Issues EDs on Financial Instruments

In October FASB released two proposed statements dealing with financial instruments. One, Accounting for Financial Instruments with Characteristics of Liabilities, Equity, or Both, would provide guidance on accounting for the noncontrolling interest in a consolidated subsidiary, for costs incurred in issuing a financial instrument that has liability or equity characteristics and for repayments and conversions of convertible debt. FASB developed the exposure draft in response to concerns of preparers, auditors, and regulators who could not determine whether certain financial instruments were to be classified as liabilities or as equities.

The other, Proposed Amendment to FASB Concepts Statement No. 6 to Revise the Definition of Liabilities, addresses inconsistencies between certain provisions of the first-mentioned ED and the distinction in FASB Concepts Statement no. 6 between liabilities and equity. It would revise the definition of liabilities to include certain obligations that require or permit settlement by issuance of the entity’s equity shares, but which do not establish a relationship as that of an owner.

Diana Willis, a senior project manager at FASB, said, reporting entities have had difficulty dealing with financial instruments that blur the line between debt and equity—for example, a compound instrument like convertible debt, which combines components of both.

“Some obligations that normally would be considered equity instruments could be settled by issuing equity shares and would become liabilities: That is because their value doesn’t change in the same direction as the value of the underlying common stock of the company. An example of this is a written put option that becomes a liability.”

The board requests comments on the EDs by March 31, 2001. Details are available at .


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