Instruments that have characteristics of both liability and equity have long been a thorny issue for the board. Separately, the PCAOB outlined next year's proposed standard-setting activities.
Breaking up is hard to do in love — and in accounting. For the Financial Accounting Standards Board, one of its biggest technical challenges has been a project addressing the separate classification and measurement of a financial instrument that has characteristics of both liability and equity.
Last week FASB continued to discuss the issue, which over the years has become "much harder than I thought it would be," according to board member Michael Crooch. The difficulty has been in devising a rule that consistently divides the instrument, he explains, while also yielding an answer that makes sense to all board members — and is not subject to being circumvented by "very smart people on Wall Street." Convertible debt is the classic example, notes Crooch: The instrument could be paid off as a debt, or it could be exchanged for shares (that is, converted to equity).
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