Communication Case 18–10 Should the present two-category distinction
between liabilities and equity be retained? Group interaction. ● LO1
The current conceptual distinction between liabilities and equity
defines liabilities independently of assets and equity, with equity
defined as a residual amount. The present proliferation of financial
instruments that combine features of both debt and equity and the
difficulty of drawing a distinction have led many to conclude that the
present two-category distinction between liabilities and equity should
be eliminated. Two opposing viewpoints are:
View 1: The distinction should be maintained.
View 2: The distinction should be eliminated and financial instruments
should instead be reported in accordance with the priority of their
claims to enterprise assets.
One type of security that often is mentioned in the debate is
convertible bonds. Although stock in many ways, such a security also
obligates the issuer to transfer assets at a specified price and
redemption date. Thus it also has features of debt. In considering this
question, focus on conceptual issues regarding the practicable and
theoretically appropriate treatment, unconstrained by GAAP.
Required:
1. Which view do you
favor? Develop a list of arguments in support of your view prior to the
class session for which the case is assigned.
