Abstract
The choice between equity and debt depends on a firm’s individual circumstances; one firm may prefer issuing equity, while another may prefer the debt financing. The traditional distinction between equity and debt is blurred through the use of instruments with characteristics of both. These hybrid instruments raise the question of whether they should be recorded as a liability or equity for the issuing firm.
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Notes
- 1.
ASC 470-20-05—Liabilities .
- 2.
FASB Emerging Issues Task Force, Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature (Issue No. 5–8), August 29, 2005, and FASB Staff Position APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), May 9, 2008.
- 3.
ASC 480-10-25-4—Distinguishing Liabilities from Equity provides that a mandatorily redeemable financial instrument is classified as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity.
- 4.
US Congress (2011): Present Law and Issues Related to the Taxation of Financial Instrument and Products—A Report to the Joint Committee on Taxation, p. 24.
- 5.
US Congress (2011): Present Law and Issues Related to the Taxation of Financial Instrument and Products—A Report to the Joint Committee on Taxation, p. 25.
- 6.
Anthony Saunders, Marcia M. Cornett (2009): Financial Markets & Institutions, Irwin/McGraw-Hill, p. 224.
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Lessambo, F.I. (2018). Shareholders’ Equity. In: Financial Statements. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-99984-5_11
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DOI: https://doi.org/10.1007/978-3-319-99984-5_11
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