The statement addresses the accounting treatment for three financial instruments. These were formerly allowed to be accounted for as a companys owners equity. The statement requires these instruments to be classified as liabilities on a companys statement of financial position.

Statement 150 impacts three types of “freestanding” financial instruments.

The first type is a mandatory redeemable ownership share, which the issuing company is obligated to buy back in exchange for cash or other assets.

A second type of instrument is a forward purchase contract or a written put option on the issuers equity shares that requires or may require the issuer to settle the obligation by transferring assets.

The third type of instrument covered by the statement are those obligations that can be settled with shares, the monetary value of which is fixed, tied to a variable such as a market index, or varies inversely with the value of the issuers shares.

Until now, these types of financial instruments have been reported by their issuers as equity, liability or somewhere in between the equity and liability sections (often referred to as “mezzanine” reporting).

The Board considered the classification as equity to be inconsistent with the relationship that exists between a company and its owners.

Statement 150 will apply to instruments used by all forms of business entities. According to its terms, the statement “shall be effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities.”

For nonpublic entities, new and existing mandatory redeemable financial instruments are subject to the statement for the first fiscal period beginning after Dec. 15, 2003.

–Ted Kirchner


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 15, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.