FAR - Specific Transactions, Events, & Disclosures - Distinguish Liab from Equity Flashcards
Mandatorily redeemable preferred stock
1) dividend
2) common stock
*actually equity, but appears as debt
= debt when they act as obligations to repurchase equity shares/require issuer to settle obligation by transferring assets
Inconsistencies
- convertible bonds are debt only until conversion (end of bond term)
- bonds issued with detachable warrants are separated into debt/equity components
some stock appreciation rights treated as equity, others as debt
Obligations to issue shares
firms purchase services/goods on credit, agree to issue stock in payment
1) agreement specifies issuance of shares worth a FIXED DOLLAR AMOUNT in payment - LIAB recorded and supplier will received agreed upon dollar value
- when shares are issued in payment, liab = extinguished. number of shares issued depends on stock price @ date of settlement (variable shares)
2) agreement specifies issuance of a FIXED NUMBER OF SHARES: EQUITY recorded, supplier/vendor accepting shareholder risk.
- stock price on date of providing goods/service determines value of transaction
- temporary O/E account credited
International Standards
Base recording on the substance of transaction
- If a financial instrument require issuer to transfer cash/other financial assets, instrument = LIABILITY
- separation of compound instruments don’t require precise info about separate debt/equity values
- issuer estimates FV of bonds alone; equity component = residual
- Always measure for DEBT FIRST
international standards
Conditions - liability
IF item meets following 2 conditions: liability
1) firm has contractual obligation to deliver cash/other financial asset OR
2) obligation to exchange another financial instrument with holder under conditions that are potentially unfavorable to issuer
true/false
firm selling the options records a liability equal to the fair value of the options issued
true
