The Financial Accounting Standards Board (FASB) has released a Preliminary Views (PV) document, Financial Instruments with Characteristics of Equity, announcing its intention to adopt the "basic ownership approach" as its preferred method of accounting for financial instruments. The PV is a precursor to FASB issuance of an Exposure Draft of a proposed Statement of Financial Accounting Standards on distinguishing between equity and liabilities or assets.

FASB describes its basic ownership approach thusly:

"Under the basic ownership approach, an instrument would be classified as equity if it (1) is the most subordinated interest in an entity and (2) entitles the holder to a share of the entity's net assets after all higher priority claims have been satisfied.  The holders of equity instruments are viewed as the owners of the entity.  All other instruments, for example, all forward contracts, options, and convertible debt, would be classified as liabilities or assets.  Instruments classified as liabilities or assets that have varying or uncertain settlement amounts would be measured at fair value with changes reported in income....The underlying principle of the basic ownership approach is that claims against the entity's assets are liabilities (or assets) if the reduce (or enhance) the net assets available to the owners of the entity."

Consistent with the goal of developing common international standards in all major areas, the International Accounting Standards Board (IASB) plans to publish the FASB's Preliminary Views in early 2008 for comment by its constituents.  The FASB and IASB plan to use the feedback they receive to determine the best way to develop a high-quality, common standard in this area.

Responses from interested parties wishing to comment on the PV must be in writing and must be received by FASB by May 30, 2008.  Filing instructions are in the front of the PV.