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FASB releases proposed accounting rules for financial instruments with equity features
New York, Nov. 30 - The Financial Accounting Standards Board announced the publication of proposed new rules for reporting for financial instruments with characteristics of equity.
The proposal is intended to help develop a single standard that will replace "the complex, 60+ piece patchwork of existing guidance that continuously raises application questions and has been a source of many restatements."
If the plan is adopted, it will impose the "basic ownership" approach, which limits the instruments that can be classified as equity to the lowest residual interests in an entity. The holders of those instruments are viewed as the owners.
All other instruments represent either liabilities or assets.
An instrument that reduces the net assets available to the owners is a liability and an instrument that enhances net assets available to the owners is an asset.
Forward contracts, options and convertible debt would be classified as liabilities or assets.
"The basic ownership approach would represent a major change to current accounting and reporting," states FASB member Tom Linsmeier.
"That change is needed to achieve two key objectives. The first is to provide investors with understandable information about the relative priority of claims on an entity's net assets and income. The second is to develop a less complex approach, which also should reduce existing opportunities to structure arrangements to achieve a desired accounting result."
The Norwalk, Conn., accounting standards organization is inviting comments through May 30, 2008.
In addition to FASB, the International Accounting Standards Board plans to publish the preliminary views in early 2008 for comment by its constituents.
The two bodies plan to use the feedback they receive to determine the best way to develop a common standard.
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