Financial Reporting Newsletter

July 2003

Issues Covered

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FASB Statement No. 150 Brings Big Changes

Executive Summary

FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, will significantly change certain companies’ balance sheets and income statements. Financial instruments previously treated as part of shareholders’ equity or “mezzanine” equity will now be liabilities, and the return paid to the holders will be interest expense rather than dividends. Some private companies will have no shareholders’ equity and no net income after implementing Statement 150. These changes may cause some companies to violate covenants in debt agreements or other contracts.

The three categories of instruments affected are:

Mandatorily redeemable shares
Freestanding written put options and forward contracts that obligate an entity to purchase its own shares
Freestanding contracts that obligate an entity to pay with its own shares in amounts that are either unrelated, or inversely related, to the price of the shares.

Statement 150 represents the first step of a larger FASB project that will consider the proper classification and treatment of instruments that combine characteristics of liabilities and equities, for example, convertible debt and puttable stock. Because this first step hones in on a select group of instruments, some entities will be able to restructure existing transactions to avoid liability classification, at least until the FASB completes later steps.

This Financial Reporting newsletter discusses each of the three categories, summarizes the requirements regarding measurement of liabilities and interest expense, earnings per share, disclosure, and effective date and transition, and answers some frequently asked questions about Statement 150.

Continue Reading - Mandatorily Redeemable Shares

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Copyright Â© 2003, BDO USA,LLP. Material discussed in this Financial Reporting newsletter is meant to provide general information and should not be acted upon without first obtaining professional advice appropriately tailored to your individual facts and circumstances.