Trend of IASB Project on the Distinction between Equity and Liabilities: The Case for Cooperatives and Continental European Firms

Abstract

The aim of this paper is to amend the research on the economic consequences of the proposed changes in equity and liabilities classification. The distinction between equity and liabilities is a challenging question for international standard setters. On this topic, the IASB and the FASB have developed a long-term project with the aim of addressing unresolved issues around classifying financial instruments as either equity or liabilities. With this regard, many approaches, which involve various effects on the gearing and on the reported earnings, have been proposed. In its 2008 discussion paper "Financial Instruments with Characteristics of Equity" the IASB exposed the alternative methods previously presented by the FASB in former Preliminary Views. Among the three different approaches, the Basic Ownership Approach was recommended in consideration of its simplicity with the hope of reducing structuring opportunities. Also the EFRAG gave its contribution to this debate by issuing its own discussion paper; it suggested a new classification method, the Loss Absorption Approach.