Can someone please summarize this from "the top 10 reasons to fix the FASB's conceptual framework"

Another CFW shortcoming is its definition of liabilities, which didnt anticipate the growing popularity of using equity-based derivative instruments to create obligations.

This definition could be revised to include all call

July 2007 I STRATEGIC FINANCE 47

options because they obligate a company to deliver shares at a discount. It should also include all other arrange- ments that similarly obligate the company to deliver fixed or variable numbers of its own shares at predetermined prices or in response to pre-established conditions.

Reporting these instruments as equity erroneously ignores the crucial fact that they dont yet endow their holders with fundamental ownership rights to dividends and voting power. Theyd be most usefully reported as liabilities until ownership rights are bestowed on their holders, which, in the case of call options, doesnt happen until they are exercised.

We think useful information is suppressed when these instruments are reported as if they create equity or, whats worse, are left off the statements entirely. Under todays GAAP, these instruments linger stealthily in the issuers equity section or off the balance sheet; with this change, they could be presented above the mezzanine as full-blown debts at their current market value, regardless of their volatility. We propose the following (our modifi- cations are italicized):

Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services or deliver equity-based financial instruments to other entities in the future as a result of past transactions or events.

The definition would include among liabilities all oblig- ations to deliver equity or derivative instruments where the underlying is the reporting entitys own securities. Although their value may not be known with certainty, the company is obligated to make an economic sacrifice in the future because of what happened in the past.