BU397 Lecture Notes - Lecture 3: Retained Earnings, Financial Instrument, Underlying
Document Summary
Hybrid/combined instruments have characteristics of both debt and equity. When analyzing whether it is debt or equity or both, consider the following: Contractual terms: does the instrument explicitly obligate the entity to pay out cash or other assets, does the instrument give the holder the choice to force the company to pay out cash. Creating an obligation: are there settlement options. Economic substance: when an instrument gives the holder increased flexibility or choice, it is worth more, must keep in mind if the instrument contains any equity like features that may need to be separated out. A financial liability where the company settles the instrument. What ever classification is chosen upon inception, the classification continues to be used until the instrument is removed from the balance sheet. Upon initial recognition financial instruments are measured at fair value: generally the exchange value, financial liabilities can be measured at fair value or amortized cost.
