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In this newsletter, we look at the following topic:
Debt or equity?
Common shares that give a residual interest in an entity are equity and a standard-term loan offered by a bank is debt (financial liability). Between these two simple points lies a host of instruments for which the question "Is it a financial liability or is it equity?" can be more challenging to answer, particularly as many entities look to shore up their balance sheets as a result of recent market events. Many performance indicators and lending covenants are measured by these accounting concepts. The distinction is also important because changes in the value of equity are not recorded in the financial statements, but subsequent changes in the value of a financial liability will affect the income statement. Re-measurement of a financial liability in these turbulent times can create significant income statement volatility.
Given the potential consequences, management should not underestimate what may seem like a simple question, as the guidance can sometimes be challenging to navigate.
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Read more by downloading our HKFRS News - Apr 2009 (pdf file, 130KB) for your reference.
Note: HKFRS has converged with IFRS effective from 1 January 2005. Contents contained in this newsletter are relevant to both HKFRS preparers and IFRS preparers.
Other Issues of HKFRS News
Accounting and Listing Rules Updates
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