Response to the FASB discussion memorandum "Distinguishing Between Liability and Equity Instruments and Accounting for Instruments with Characteristics of Both"

• Published in: Accounting horizons Vol. 7; no. 3; p. 105
• Main Authors: Weygandt, Jerry J, Collins, William A, Crooch, G Michael, Heath, Loyd C
• Format: Journal Article
• Language: English
• Published: Sarasota American Accounting Association 01.09.1993
• Subjects: Classification; Committees; Compensation; Equity; Exposure drafts; Financial accounting standards; Financial instruments; Financial reporting; Financial statements; Legal fees; Liabilities; Liability; Market prices; Shareholders equity; Stock options; Stock rights; Stockholders; United States > US
• ISSN: 0888-7993

The American Accounting Association's Financial Accounting Standards Committee believes that the current definition structure for debt and equity need not be reexamined. However, the Committee recommends that the FASB illustrate how the definitions in Concepts 6 are to be applied. The Committee believes that a financial instrument, such as mandatorily redeemable preferred stock, that obligates an enterprise to redeem or repurchase its own stock for a specified or determinable amount should be classified as a liability instrument. The Committee also recommends that the difference between the issuance price and the mandatory redemption price be treated as a dividend rate adjustment, and amortized over the life of the liability similar to a premium or discount for bonds. The Committee believes that put options should be reported as a liability. The liability should be the proceeds from the premium, not the total repurchase price of the stock.