FASB Issues Preliminary Views on Financial Instruments with Characteristics of Equity

Norwalk, CT, November 30, 2007—The Financial Accounting Standards Board (FASB) today issued its Preliminary Views (PV), Financial Instruments with Characteristics of Equity, to obtain feedback on the Board's proposal to simplify and improve financial reporting for financial instruments with characteristics of equity. The proposal represents a major step in the development a single standard that would replace the complex, 60+ piece patchwork of existing guidance that continuously raises application questions and has been a source of many restatements. Constituents have until May 30, 2008, to comment on the Board's proposal.

The PV describes the Board's preferred "basic ownership" approach, so named because it limits the instruments that can be classified as equity to the lowest residual interests in an entity. The holders of those instruments are viewed as the owners of the entity. All other instruments represent either liabilities or assets. An instrument that reduces the net assets available to the owners of the entity is a liability; and an instrument that enhances net assets available to the owners is an asset. Under this approach, forward contracts, options, and convertible debt would be classified as liabilities or assets.

"The basic ownership approach would represent a major change to current accounting and reporting," states FASB member Tom Linsmeier. "That change is needed to achieve two key objectives. The first is to provide investors with understandable information about the relative priority of claims on an entity's net assets and income. The second is to develop a less complex approach, which also should reduce existing opportunities to structure arrangements to achieve a desired accounting result."

The FASB believes its proposal is generally consistent with the views of some investor groups, such as CFA Institute, who have called for a narrow, principles-based view of equity. It also is responsive to other FASB constituents' concerns about the complexity of the existing piecemeal guidance.

Consistent with the goal of developing common international standards in all major areas, the International Accounting Standards Board (IASB) plans to publish the FASB's Preliminary Views in early 2008 for comment by its constituents. The FASB and IASB plan to use the feedback they receive to determine the best way to develop a high-quality, common standard in this area.

The Preliminary Views is available at the FASB website by logging on to Comments on the Preliminary Views must be received in writing by May 30, 2008. They can be submitted by email (, File Reference 1550-100) or via U.S. mail, addressed to the "Technical Director-File Reference 1550-100" at Financial Accounting Standards Board, 401 Merritt 7, PO Box 5116, Norwalk, Connecticut 06856-5116.

About the Financial Accounting Standards Board

Since 1973, the Financial Accounting Standards Board has been the designated organization in the private sector for establishing standards of financial accounting and reporting. Those standards govern the preparation of financial reports and are officially recognized as authoritative by the Securities and Exchange Commission and the American Institute of Certified Public Accountants. Such standards are essential to the efficient functioning of the economy because investors, creditors, auditors, and others rely on credible, transparent, and comparable financial information. For more information about the FASB, visit our website at