The Impact Of The Distinction Between Financial Liabilities And Equity Instruments On Firms

Since the 20 th century,with the steady development of China's economy,traditional financing methods such as equity financing and debt financing have been unable to meet the diverse financing needs and complex financing environment of enterprises.Innovative financial instruments such as preferred shares and perpetual bonds have emerged as the times require and integrated the advantages of equity financing and debt financing.Since innovative financial instruments emerged,they have been a hot topic for scholars,due to the widespread application,complexity,and severity of their impacts.At present,it is controversial to categorize this innovative financial instrument which integrated the characteristics of debt financing and equity financing into financial liabilities or equity instruments.And it is hard to set the standards.The same financial instrument can even change its economic essence only with changing the terms instead of changing its form.While innovative financial instruments with the nature of debt and equity work in the capital market,and they also brings great challenges to accounting and measurement.Once the categorization is slightly different,the financial statement results and indicators can vary widely.Accordingly,IASB and FASB have related discussions and provisions,but there are big differences between the two.In recent years,there have been more and more cases where the financial statement data caused by the division of financial liabilities and equity instruments deviations from the true operating conditions of the enterprise.On July 9th,2018,the Xiaomi Group successfully listed with two years' loss,sparking heated public discussions.According to the prospectus,the Xiaomi Group suffered a serious loss.The reasons for this is the accounting classification of convertible and redeemable preference shares.According to CAS,preferred shares should be recognized as financial liabilities that are measured at fair value and whose changes are included in the current profit and loss.With the rise of Xiaomi Group's own valuation,the changes in the fair value of preferred shares from 2015 to 2017 have brought Losses of RMB 8.76 billion,RMB 2.52 billion,and RMB 54.07 billion respectively,which have seriously affected corporate performance.Based on Xiaomi's case,this paper mainly adopts literature research method and comparative research method.As it starts from the history of the establishment of financial instrument accounting standards,it tends to explore the current classification method of financial liabilities and equity instruments and the development of subsequent measurement and to compare the distinction between financial liabilities and equity instruments by international accounting standards and US GAAP.By analyzing the deviation of accounting information from Xiaomi's current operating performance,drawing on the US general accounting principles and other ideas,solving problems by increasing the disclosure of non-IFRSs,using U.S.GAAP to account for “Mezzanine”,and calculating the fair value changes into other comprehensive income caused by valuations in order to eliminate distortion of accounting information.In the end,put forward feasible suggestions,and comment on the relevant results.This paper improves the research of the literature,and exemplifies the hidden problems in the current distinction between financial liabilities and equity instruments in the form of cases,and makes a little supplement to the improvement of innovative financial instruments.