FASB tackles difficult liabilities and equity topic

The guidance was described as inconsistent and overly complex.

FASB moved to address one of the most misunderstood areas of financial reporting, issuing a proposal that's intended to help distinguish liabilities from equity.

The proposed Accounting Standards Update (ASU) is designed to improve the board's guidance for certain financial instruments with characteristics of liabilities and equity, including convertible instruments.

FASB Chairman Russell Golden said in a news release that stakeholders responding to FASB's agenda consultation project a few years ago described liabilities and equity guidance as overly complex, internally inconsistent, and the source of frequent restatements.

"We believe the proposed ASU would help reduce complexity and improve understandability in this area while providing financial statement users with more relevant information," Golden said.

The proposal seeks to improve FASB's guidance on both convertible instruments and the derivatives scope exception for contracts in a company's own equity. The proposal would:

  • Reduce the number of accounting models for convertible debt instruments and convertible preferred stock.
  • Revise the derivatives scope exception guidance to reduce form-over-substance-based accounting conclusions driven by remote contingent events.
  • Change the related disclosure and earnings-per-share guidance.

Comments on the proposal are due Oct. 14 at FASB's website.

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