The FASB Has Been Struggling with the Issue of Determining

question 41

Essay

The FASB has been struggling with the issue of determining the difference between debt and equity financing for nearly twenty years.The Board is concerned that many provisions of U.S.GAAP conflict with the definition of a liability given in the Conceptual Framework.As a result,the Board is considering a new approach,called the basic ownership approach,to distinguishing between debt and equity financing.
As part of this new approach,the FASB has suggested that all share-based compensation instruments should be classified as liabilities.
Required:
Explain the FASB's rationale for classifying share-based compensation instruments as liabilities.

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