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FASAC Supports Liabilities and Equity Guidance Overhaul

For the past 30 years, the Financial Accounting Standards Board (“FASB”) has tried to fix the complex areas of its liabilities and equity guidance. Efforts have resulted in little success, so the FASB’s Financial Accounting Standards Advisory Council (“FASAC”) wants a major overhaul of Topic 480, Distinguishing Liabilities from Equity.

At the FASAC’s December 15 meeting, the majority of members suggested the FASB take a holistic approach in improving the guidance, and address the matter as a whole rather than target certain aspects. FASAC member Mark LaMonte said the issue is complex enough that a segmented approach would not help distinguish between liabilities and equity, and recommended convertible instruments be treated as liabilities. This would allow the FASB to require relevant disclosures on the financial instruments a company lists on its balance sheet.

FASB member Lawrence Smith believes the liabilities and equity accounting project could take 10 years to complete. Before getting into specifics of the project, the FASB would have to identify conceptual terms. Concurrently, the FASB will have to adjust to incoming members catching up on its standard-setting agenda, causing a potential slowdown in progress made on the project.

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