Distinguishing Liabilities From Equity

Roadmap
Distinguishing Liabilities From Equity (March 2025)

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This Roadmap provides an overview of the guidance in ASC 480 as well as insights into and interpretations of how to apply it in practice. ASC 480 requires (1) issuers to classify certain types of shares of stock and certain share-settled contracts as liabilities or, in some circumstances, as assets and (2) SEC registrants to classify certain types of redeemable equity instruments as temporary equity.

ASC 480 is the starting point for determining whether an instrument must be classified as a liability. SEC registrants and non-SEC registrants that elect to apply the SEC’s guidance on redeemable equity securities must also consider the classification within equity (i.e., permanent vs. temporary equity). ASC 505 addresses the accounting for certain transactions involving financial instruments classified within equity (e.g., dividends and share repurchases) and also provides general guidance related to equity instruments.

Securities issued in the legal form of debt must be classified as liabilities. In addition, ASC 480 requires liability classification for three types of freestanding financial instruments that are not debt in legal form: (1) mandatorily redeemable financial instruments (i.e., equity shares that include an unconditional obligation of the issuer to redeem the instrument for cash or other assets), (2) obligations to repurchase and issuer’s equity (i.e., instruments other than equity shares that include an obligation of the issuer to repurchase its equity shares), and (3) obligations to issue a variable number of equity shares (i.e., certain types of instruments that obligate the issuer to issue a variable number of equity shares).

The 2025 edition of this Roadmap contains updated and expanded guidance. It also includes a comprehensive new chapter on the accounting for and disclosure of certain transactions involving equity instruments.

Also available is the latest edition of On the Radar, a high-level summary of emerging issues and trends related to the accounting and financial reporting topics addressed in the Roadmap.

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