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Preferred Stock: Liability or Equity?

Author

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  • Jaan Alver

    () (Department of Accounting at Tallinn University of Technology)

Abstract

Accounting for financial instruments has been the most controversial area in the development of the IASBís standards. The FASB and the IASB are currently working together towards a comprehensive standard of accounting for financial instruments with characteristics of equity, liability, or both. The main problem is how to distinguish liabilities from equity. According to the FASB, a new standard is necessary because current accounting literature addressing this issue is inconsistent, subject to structuring and difficult to understand and apply. This paper examines the current situation in classifying preferred stocks. A detailed comparison of common and preferred stocks, and debt securities and preferred stocks is then presented. Three theories of equity (proprietary theory, entity theory and residual equity theory) are described and compared, and the legal and economics approach to determining the difference between liabilities and equity are discussed. Finally, the IASB rules set up in IAS 32 and the Estonian rules set up in Commercial Code and accounting guideline RTJ 3 are discussed.

Suggested Citation

  • Jaan Alver, 2007. "Preferred Stock: Liability or Equity?," Working Papers 165, Tallinn School of Economics and Business Administration, Tallinn University of Technology.
  • Handle: RePEc:ttu:wpaper:165
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    File URL: http://deepthought.ttu.ee/majandus/tekstid/TUTWPE_07_165.pdf
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    More about this item

    Keywords

    IAS 32; financial instrument; equity instrument; liability; preferred stock; preference share(s);

    JEL classification:

    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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