BU397 Chapter Notes - Chapter 16: Liquidity Risk, Underlying, Retained Earnings
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. 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: definitions of financial statement elements. Financial liability is any liability that is a contractual obligation to do either of the following. Deliver cash or other financial assets to another party. Exchange financial instruments with another party under conditions that are potentially unfavorable. Where the instrument is settle-able using the entity"s shares instead of cash: a financial liability where the company settles the instrument using a variable number of shares instead of cash.
