Fall 2010 Class 4

Fall 2010 class 4

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Unformatted text preview: CHAPTER 16 Complex Financial Instruments Questions We Need to Answer Questions We Need to Answer 1. What are the major types of hybrid financial What instruments? instruments? 2. What are the presentation and measurement What issues in accounting for hybrid financial instruments? instruments? 3. How to account for the issuance, conversion, How and retirement of convertible debts. and 4. What are the basic derivatives? What 5. How to record and disclose derivatives? 5. Debt vs. Equity Debt vs. Equity • What are the differences between debt instruments and What equity instruments? equity • Debt Instrument – The borrower pays interests and has to pay back the debt in The the future. the • Equity Instrument – – The holders of equity instrument are the owners of the firm No refund of the investment, and return is not guaranteed Presentation Issues Presentation Issues • Hybrid instruments (compound financial instruments) Hybrid have characteristics of both debt and equity characteristics • The economic substance of the instrument needs to The economic be examined to determine reporting classification be • Examples: Examples: – – – – perpetual debt callable / redeemable preferred shares, and retractable preferred shares convertible debt Perpetual debt example Perpetual debt example Source: Air Canada 2004 Annual Report The maturity of this subordinated perpetual d...
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