Volume 10, No. 5


Righting The Right-hand Side Of The Balance Sheet:  The FASB's long-standing project on improving reporting for financial instruments has given users much more information to examine in the last ten years: disclosures about the nature and fair value of financial instruments in the early 1990's, for instance. More recently, the latest effort in the project spawned Statement No. 133, governing the accounting for derivatives. Yet, there's one elementary problem that the project hasn't solved, one so basic that it's almost incredible. That problem is: what's the difference between liability instruments and equity instruments? Most first-year accounting students will happily tell you that liabilities are recorded when money is borrowed from creditors and equity is money that comes from shareholders. In the brave new world of financial innovation, however, investment bankers have mucked up those neat distinctions with the creation of financial instruments that don't fit easily into either category. The FASB has put together a proposed standard that should help accountants draw those lines more clearly - and at the same time, it addresses long-running issues surrounding minority interests and gains on "carve-outs" of subsidiary stock. If applied as planned, it could lead to sharper distinctions between debt and equity.

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