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FASB Finalizes Rules on Shares With Embedded Derivative Features

Tammy Whitehouse | November 5, 2014

The Financial Accounting Standards Board has finalized its hedge accounting guidance meant to eliminate the use of different accounting methods when companies raise capital by offering shares that include embedded derivative features.

Shares with embedded derivative features are often called hybrid financial instruments because they have features that make them like both debt and equity. The issues arise when companies raise capital by issuing different classes of shares that provide different preferences and rights, like conversion rights, redemption rights, voting rights, liquidation and dividend payment preferences, and so on.

In some cases, companies account for such hybrid instruments considering all the terms and features in the instrument, including the embedded derivative; in other cases, companies consider all the features...

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