Liabilities and Equity

Date recorded:

FASB staff conducted an educational session to update the IASB on status of the FASB's liabilities and equity project. The objective of the project is to establish a framework for classifying and measuring instruments with characteristics of equity and liabilities under US GAAP.

Staff noted that the approach being presented today encompasses not only the single-component financial instruments, which the Board discussed at its March 2005 meeting, but also multiple-component financial instruments.

Staff presented an accounting approach called the Ownership-Settlement Approach. The approach is based on 13 principles that deal with classification, initial measurement, subsequent measurement, separate reporting within equity, and extinguishment accounting. The presentation included a comparison of the approach to current IFRS literature.

In addition to this approach, the FASB will further develop two alternative approaches:

  • The Dilution Approach. A narrower view of equity that bases its classification scheme on whether an instrument will or might dilute net assets belonging to existing shareholders.
  • Reassessed Expected Outcomes (REO) Approach. This approach was presented to the IASB at its June 2004 meeting. REO is a probabilistic-based approach that applies contingent claims modelling techniques to determine classification based on the current economic conditions.

After choosing one approach, the FASB to publish a Preliminary Views document in the second quarter of 2007.

No decisions were made during this session.

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