Response to the FASB’s Preliminary Views on Financial Instruments with the Characteristics of Equity

The Financial Reporting Policy Committee (Committee) of the Financial Accounting and Reporting Section of the American Accounting Association is charged with responding to discussion papers and exposure drafts related to financial accounting and reporting issues. The Committee is pleased to respond to the Financial Accounting Standards Board's (FASB) Preliminary Views on Financial Instruments with the Characteristics of Equity (PV). The FASB issued the PV in response to an "increase in classification issues" related to liabilities and equity. Although the FASB has considered numerous approaches for distinguishing debt and equity, the PV describes three possible equity-attribute-based approaches for distinguishing equity instruments from nonequity instruments (these nonequity instruments are usually liabilities, but some- times are assets): basic-ownership (BO), ownership-settlement, and reassessed-expected outcomes. In summary, the Committee concludes that the principles underlying the BO approach are not clearly defined, are not appropriate given the extant conceptual framework, and will not simplify accounting for instruments that are within the scope of the PV.