FASB Creates Possible Solution to Debt vs. Equity Issue

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With venture capitalists still running amok to fund start-ups and other endeavors, the accounting rules applying to debt versus equity have been under scrutiny for some time.

Late last week, the Financial Accounting Standards Board (FASB) proposed a solution to the rule: it would establish standards for accounting for financial instruments with characteristics of liabilities, equity or both.

The new rule also would establish standards for certain issues related to accounting for the non-controlling interest in a consolidated subsidiary. Guidance would also be provided on accounting for costs incurred to issue a financial instrument that has either debt or equity characteristics.

Additional considerations, including accounting for repayments and the conversions of convertible debt into stock, are included in the proposal.

It is too soon to determine whether these procedures will be approved; FASB has the drafts of the reports available on their Web site. Comments are due by March 2001.

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