If a financial instrument is an equity instrument in substance, but its legal form is debt, any periodic payments made to investors will be accrued on the company's financial statements as interest expense.

Question

Quizplus · Accepted Answer

Periodic payments on an instrument that is equity in substance would not be recorded as interest expense, but rather as distributions to equity holders, such as dividends. Interest expense is associated with debt instruments.

If a Financial Instrument Is an Equity Instrument in Substance