Some financial instruments can be considered compound instruments in that they h

Question

Some financial instruments can be considered compound instruments in that they have features of both debt and shareholders’ equity. The most common example encountered in practice is convertible debt—bonds or notes convertible by the investor into common stock. A topic of debate for several years has been whether:

·         View 1: Issuers should account for an instrument with both liability and equity characteristics entirely as a liability or entirely as an equity instrument depending on which characteristic governs.

·         View 2: Issuers should account for an instrument as consisting of a liability component and an equity component that should be accounted for separately.

In considering this question, you should disregard what you know about the current position of the FASB on the issue. Instead, focus on conceptual issues regarding the practicable and theoretically appropriate treatment, unconstrained by GAAP. Also, focus your deliberations on convertible bonds as the instrument with both liability and equity characteristics.

Required:

1.       Which view do you favor? Develop a list of arguments in support of your view prior to the class session for which the case is assigned.

2.      In class, your instructor will pair you (and everyone else) with a classmate (who also has independently developed an argument).

a.      You will be given three minutes to argue your view to your partner. Your partner likewise will be given three minutes to argue his or her view to you. During these three-minute presentations, the listening partner is not permitted to speak.

b.      After each person has had a turn attempting to convince his or her partner, the two partners will have a three-minute discussion in which they will decide which view is more convincing. Arguments will be merged into a single view for each pair.

3.      After the allotted time, a spokesperson for each of the two views will be selected by the instructor. Each spokesperson will field arguments from the class in support of that view’s position and list the arguments on the board. The class then will discuss the merits of the two lists of arguments and attempt to reach a consensus view, though a consensus is not necessary.

Communication Case 14-3 ls convertible debt a liability or is it shareholdera' equity? Group Interaction L014-5 3 Some financial instruments can be considered compound instrumesns in that they have features of both debt and shacebolders' equity. The mou common example escousteced in practice is convertible debt-bonds oe nos convertibile by the investor into common stock A topic of debate foe several years has been whether View I: Iasuers should account foe an inatrument with both Nabiliny and equity characteriatics entiely saliabilty oe enticely as an equiny inument degending on which charactesistie govens View 2: Issuers should account for an instrument as comsining of a liability component and an equity composent that should be accounted for separately In considering this question, you shovuld diue ard what you knoe about the current position of the FASB on the issue Insttad, focus on conceptual issues segarding the practicable and theoceticaly Pare $25 reanment unccastrised by GAAP. Alo focus your deliberaticas on coavertible boods as the iasrument with boch liability and equiry chaacceristics Required .Whuch viem do you Eavor? Develop a list of azgaments in support of your viprior to the class session for mhich thecase i assigned 2 In class, your instzucooe will pair you (and everyose else) with a classmace(bo lo bas independently develoged an yament). You will be given three minutes to argoe your view to your partner. Your partner likewise will be given three manunes to argue his or her viese to you During tdheve three-minute presentation, the listening partne is not pemimed to speai b. Afer each person bas hada mepringso conviace his oe her partnes, the two partnees wall have a three-minute diveussion in which they will decide which view is more coavineing. Argume wil be merged into a singlevie for each pair 3. Afer the allotsed time, a spokespeson for each of the t viees will be selected by the instractoc Each epolcesperon mi field uments fromn the class in support of that viw's position and t the arguments the board. The claus then will diveuss the erits of the two liuts of argumenns and amemet so seach aconensus view, thouh aconsenus i not necessary

Explanation / Answer

1.View no2. An instrurmnet will be shown liability portion separately and equity portion separately.

2.With classmate.

we will do discussion on heads of the financial statemnts and the traetment of financial statemnts. Will also refer to the Accountaning standards so to reflec the true position of financial position

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