On 30 November 2007, the FASB issued for public comment a Preliminary Views document on how to distinguish liabilities from equity. If adopted, these Preliminary Views could radically change how contracts are classified either as liabilities or assets or as equity. Under what FASB calls the basic ownership approach, only the most subordinated class of common stock will qualify as equity. Other contracts currently classified as equity (such as preferred stock and certain option and forward contracts on an entity's own equity) would instead be classified as liabilities (or, in some cases, assets). This Heads Up discusses the FASB's Preliminary Views, their application to some common contracts, and how they compare with current accounting requirements. Interested parties should provide comments to the FASB by 30 May 2008. The IASB expects to issue a Discussion Paper in the first quarter of 2008 inviting comments on FASB's Preliminary Views.
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