Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

FASB tries to define equity and liability

The Financial Accounting Standards Board (FASB) in the United
States has put out a very interesting document
outlining its preliminary views on a consistent definition of equity
and liabilities. As highlighted in Table 2 at the end of the document,
the FASB proposals would involve substantial changes in current
accounting practice. In particular, it would allow gains or losses to
be recognized when a company enters into derivative transactions on
its own stock.

Years ago, while writing a paper
on Enron, I came across instances where current accounting treatment
for such transactions is not in line with economic realities, but
thought that the changes required to bring them in alignment would be
too drastic for accountants to countenance. It is fascinating to find
that FASB is prepared to contemplate making these drastic changes and
it is likely that the International Accounting Standards Board (IASB)
would move in the same direction as well.

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