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 a fixed rate?
C) Is the amount convertible into common shares?
D) Is the debtor legally obligated to repay the principal at the option of the creditor?

Question

Quizplus · Accepted Answer

The other options listed (A, B, and D) are characteristics of debt instruments rather than equity. Therefore, if any of these conditions are met, the instrument is likely to be classified as debt rather than equity. However, if the amount is convertible into common shares, it is a characteristic of equity, indicating that the instrument has some element of ownership in the company.

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