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Abstract:
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This thesis presents a comparative analysis from an accounting and tax perspective of hybrid
financial instruments. The scope of this thesis is solely focused on the issue of classification of
hybrid instruments and the challenges it poses to the fair view and presentation in the financial
reporting. Final in the end of the thesis the most developed alternatives to the current IAS 32 are
introduced. The thesis analyzes this classification issue from a normative perspective. In order to
define the underlying reasons for the challenges related to classification, definitions of equity and
liabilities are theoretically described for both accounting (based on international IFRS standards)
and tax (based on interpretation of Danish tax legislation). Firstly, it is concluded that discrepancies
between accounting and tax are based on the difference underlying rationals they are serving;
where accounting perceived classification of a hybrid financial instrument from an investor-risk
perspective, tax legislation is more concerned about tax-shield. Secondly, accounting defines equity
as a residual of assets, whereas tax legislation is based on obligation law's definition of ownership.
Furthermore, there is a widely inconsistence usage of entity or proprietary view in IAS 32, and the
basic principles in IAS 32 are not aligned with the IFRS Framework. These issues challenge a fair
view of the financial presentation of the tax and legal features of the hybrid financial instruments.
Based on the above challenges, the thesis presents some of the alternatives that have been
developed by IASB, FASB and EFRAG, and discussed whether these can solve the above challenges.
Basic Ownership Approach (BOA) and Loss Absorbtion Approach (LAA) are both more or less based
on legal ownership and are therefore both aligned with the tax legislation. However, BOA has been
eliminated by IASB and LAA requires that the structure of the financial reporting is altered since
LAA differs between equity, risk capital and liabilities. At current state no workable alternatives for
the present IAS 32 exist. In order to illustrate the analysis and the challenges related to the
classification issue, three cases are used throughout the thesis. |
