FASB tries to define equity and liability

The Financial Accounting Standards Board (FASB) in the United States has put out a very interesting document outlining its preliminary views on a consistent definition of equity and liabilities. As highlighted in Table 2 at the end of the document, the FASB proposals would involve substantial changes in current accounting practice. In particular, it would allow gains or losses to be recognized when a company enters into derivative transactions on its own stock.

Years ago, while writing a paper on Enron, I came across instances where current accounting treatment for such transactions is not in line with economic realities, but thought that the changes required to bring them in alignment would be too drastic for accountants to countenance. It is fascinating to find that FASB is prepared to contemplate making these drastic changes and it is likely that the International Accounting Standards Board (IASB) would move in the same direction as well.

Posted at 1:39 pm IST on Mon, 10 Dec 2007         permanent link

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