Minicase-8 Essay Example | Topics and Well Written Essays - 500 words

Minicase-8 - Essay ExampleHowever, under the ED, only those conversion options that establish an ownership relationship will be classified as equity (ED-FI, p. 4). This means that, once converted, the shares are not redeemable and that the holder bears the risk of the changes in the market value of the issuers shares of stock. If the option does not concern this criterion, the entire convertible bond will be classified as liability.Prior to the issuance of SFAS 145, the standard used to account for early extinguishment of debt was FASB Statement no 4, Reporting Gains and Losses from Extinguishment of Debt. Under Statement No. 4, the gains or losses realized from the early settlement of debt should be shown as part of the companys extraordinary items in its income statement. This classification is required regardless of the reason behind the early settlement.Under SFAS 145, gains or losses from early extinguishment of debt can now be classified as part of the income or loss from con tinuing operations in the income statement provided that early extinguishments of debts are part of the recurring legal proceeding for the issuer. However, if much(prenominal) early extinguishments of debts are unusual or are infrequent transactions, the gains or losses realized from such early extinguishments should still be classified as extraordinary items in the income statement. The change was made because FASB recognized that early payments of debt have become part of the risk management strategy of certain companies. Such transactions are now also viewed as recurring financing activities that an entity can utilize to manage its interest rate risk. FASB also thinks that this change is consistent with the translation of unusual or extraordinary transactions under APB Opinion No. 30 and will reduce the frequency of using the caption extraordinary items in the income statement.The requirement of SFAS 145 related to the classification of gains or losses from early extinguishmen t of debt affects