In order to determine if, in substance, a complex financial instrument is equity, the answer should be no to all of the following except:
A)Is the periodic return on capital obligatory?
B)Is the debtor legally obligated to repay the principal at the option of the creditor?
C)Is the amount convertible into common shares?
D)Is the debtor legally obligated to repay the principal at a fixed rate?

Question

Quizplus · Accepted Answer

The key characteristic of equity is ownership interest, which often includes rights to dividends and voting in certain company decisions. Convertibility into common shares (option C) aligns with equity characteristics, as it provides the potential for ownership in the company. Options A, B, and D describe debt-like obligations, such as mandatory repayments and fixed returns, which are not characteristics of equity.

In Order to Determine If, in Substance, a Complex Financial