Norwalk, Conn. (May 16, 2003) -- In an effort to improve how issuers account for certain financial instruments with characteristics of both liabilities and equity, the FASB has issued a new Standard, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. It requires that issuers classify such instruments as liabilities in statements of financial position. This step eliminates inconsistencies in reporting that were possible under prior guidance.

Statement No. 150 deals with three types of freestanding financial instruments: (1) mandatorily redeemable shares which the issuing company is obligated to buy back in exchange for cash or other assets; (2) instruments that do require or may require the issuer to buy back some of its shares in exchange for cash or other assets. This group includes put options and forward purchase contracts; and (3) obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers’ shares.

In addition to dealing with classification and measurement of financial instruments in its scope, SFAS No. 150 also requires disclosures about alternative ways of settling the instruments and the capital structure of entities, all of whose shares are mandatorily redeemable. The Statement does not apply to features embedded in a financial instrument that is not a derivative in its entirety.

Most of the guidance in the Statement is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. For private companies, mandatorily redeemable financial instruments are subject to this Statement for the fiscal period beginning after December 15, 2003. The Statement is available at

-- Michael Stevens

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