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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
2. What are the presentation and measurement
issues in accounting for hybrid financial
3. How to account for the issuance, conversion,
and retirement of convertible debts.
4. What are the basic derivatives?
5. How to record and disclose derivatives?
5. Debt vs. Equity
Debt vs. Equity
• What are the differences between debt instruments and
• Debt Instrument
– The borrower pays interests and has to pay back the debt in
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
• Hybrid instruments (compound financial instruments)
have characteristics of both debt and equity
• The economic substance of the instrument needs to
be examined to determine reporting classification
– 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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