Accounting for Financial Instruments with Characteristics of Debt and Equity: Finding a Way Forward

52 Pages Posted: 12 Mar 2019

See all articles by Neil L. Fargher

Neil L. Fargher

Australian National University (ANU)

Baljit K. Sidhu

UNSW Australia Business School, School of Accounting

Ann Tarca

University of Western Australia

Warrick Van Zyl

The University of Western Australia

Date Written: March 2019

Abstract

Accounting for compound financial instruments, that is those with characteristics of both debt and equity, has challenged accounting standard setters for decades. The principles developed to distinguish liabilities and equity and the application of these principles in IAS 32 have been widely criticised. In 2016–2017, the IASB was engaged in a project to improve IAS 32. Our study presents research that is relevant to the issues faced by standard setters, related to improving the definitions and enhancing presentation and disclosure of liabilities and equity. We discuss studies investigating the effects of the accounting classification requirements on firms’ financing choices and on users’ decision‐making, to examine the question, ‘Does the distinction matter?’ We then explore various approaches that may be pursued by the standard setters to improve accounting in this area and identify areas for future research.

Keywords: Compound instruments, Equity, Hybrid, IAS 32, Liabilities

Suggested Citation

Fargher, Neil L. and Sidhu, Baljit K. and Tarca, Ann and Van Zyl, Warrick, Accounting for Financial Instruments with Characteristics of Debt and Equity: Finding a Way Forward (March 2019). Accounting & Finance, Vol. 59, Issue 1, pp. 7-58, 2019, Available at SSRN: https://ssrn.com/abstract=3349316 or http://dx.doi.org/10.1111/acfi.12280

Neil L. Fargher (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Baljit K. Sidhu

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia

Ann Tarca

University of Western Australia ( email )

Business School
35 Stirling Highway
Crawley WA 6009
Australia
+61 8 6488 3868 (Phone)
+61 8 6488 1047 (Fax)

Warrick Van Zyl

The University of Western Australia

35 Stirling Highway
Crawley, Western Australia 6009
Australia

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