Extinguishing Financial Liabilities with Equity Instruments: Theory and Practice Problems
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Oct 25, 2016
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Abstract
EU introduced “fair value” accounting rules to evaluate equity instruments issued by the debtor for creditors to extinguish financial liabilities to them. These rules are not applied if the creditor is also a direct or indirect shareholder. This paper examines approaches to the evaluation debt when the shareholder’s liabilities are capitalized. Evaluation of those debts should include an audit of the documents related to incurring of debt, followed by an analysis of the debtor’s liquid assets to secure the debt. This is necessary to prevent the use of loopholes in legislation. Then the methods of business evaluation could be applied in any private enterprise.
Keywords: capitalization of debts, set-off of claims , fair value, income tax, “internal” liabilities
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References
[1] COMMISSION REGULATION (EU) No 662/2010 of 23 July 2010. Annex. IFRIC. Interpretation 19. Extinguishing Financial Liabilities with Equity Instruments.- paragr.4,3.
http://ec.europa.eu/finance/accounting/docs/arc/2010-03-04_ifric19_annex_en.pdf
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http://ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/economic_analysis/tax_papers/taxation_paper_33_en.pdf
[3] Alan Carter (Eds ) . International Tax Dialogue: Key issues and debates in VAT, SME taxation and the tax treatment of the financial sector. 2013.-217, pages 109-110.
http://www.oecd.org/tax/tax-global/ITD-publication-decade-sharing-experiences.pdf
[4] Procedures for the privatization of the tax debt capitalization methods. Rules of the Cabinet of Ministers of the Latvian Republic. Nr.986. Riga, December 2, 2008 - paragr.7.2.- only in Latvian: http://likumi.lv/doc.php?id=184814
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[7]The Commercial Law. The law of Latvian republic.04.05.2000 (with amendments to 16.01.14.//Text consolidated by Latvian State Language Centre). - Sections 197(5), 250(4), 198(1)8.
http://www.vvc.gov.lv/advantagecms/LV/meklet/meklet_dokumentus.html?query=+The+Commercial+Law+of+Latvia&Submit=Mekl%C4%93t&resultsPerPage=10
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http://www.ifrs.org/Meetings/MeetingDocs/IASB/2015/May/AP05B-FICE.pdf
[11] Firas Aziz M. Jawad, Xinping Xia. International Financial Reporting Standards and Moral Hazard of Creative Accounting on Hedging. International Journal of Finance and Accounting 2015, 4(1): 60-70, page 61,
http://article.sapub.org/10.5923.j.ijfa.20150401.06.html
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[13] Commercial Code. Act of the Republic of Estonia, passed 15 February 1995, entered into force 1 September 1995. (RT1 I 1995, 26/28, 355; consolidated text RT I 2005, 63, 481), Translation publihed 16.06.2015. – article 194.1.
https://www.riigiteataja.ee/en/eli/ee/Riigikogu/act/516062015010/consolide
[14] DIRECTIVE 2012/30/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 25 October 2012. - Document 32012L0030. Official Journal of the European Union. 14.11.2012 – аrticles 9-10.
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32012L0030
[15] IAS Plus apdate. FRIC clarifies accounting for debt for equity swaps. Deloitte. December 2009.-4. Page 1 http://www.iasplus.com/en/binary/iasplus/0912ifric19.pdf
[16] Extinguishing financial liabilities with equity instruments. EYGM Limited. ey.com/IFRS. Issue 62 / November 2009. Supplement to IFRS outlook.-pages 1-2. https://www2.eycom.ch/publications/items/ifrs/olk/200911_supplement_62/200911_supplement_ifrs_outlook_62.pdf
[17] Extinguishing Financial Liabilities with Equity Instruments. HK(IFRIC). Interpretation 19.Hong Kong Institute of Certified Accountants.2014.-13. Page8-BC4 http://app1.hkicpa.org.hk/ebook/HKSA_Members_Handbook_Master/volumeII/hk%28ifric%29-int%2019.pdf
[18] Financing transactions: debt, equity and instruments in between.2014. Second edition, March 2015.PWH-333 – page101 http://www.pwc.com/en_US/us/cfodirect/assets/pdf/accounting-guides/pwc-guide-financing-transactions-debt-equity-second-edition-2015.pdf
[19] Vittorio Salvadori di Wiesenhoff and Roberto Egori. Tax Issues in Consensual Debt Restructuring. In „DERIVATIVES & FINANCIAL INSTRUMENTS– SPECIAL ISSUE. ” SEPTEMBER 2012. Еd. Machiel Lambooij. IBFD. 36-43,р.41 http://www.freshfields.com/uploadedFiles/SiteWide/Knowledge/IBFD%20Special%20Issue%20-%20Consensual%20debt%20restructuring.pdf
http://ec.europa.eu/finance/accounting/docs/arc/2010-03-04_ifric19_annex_en.pdf
[2 ] Serena Fatica,Thomas Hemmelgarn, Gaëtan Nicodème. The Debt-Equity Tax Bias: consequences and solutions.European Commission.TAXATION PAPERS. WORKING PAPER N.33 – 2012- 26 p.. ISBN 978-92-79-25419-2, pages 6-8.
http://ec.europa.eu/taxation_customs/resources/documents/taxation/gen_info/economic_analysis/tax_papers/taxation_paper_33_en.pdf
[3] Alan Carter (Eds ) . International Tax Dialogue: Key issues and debates in VAT, SME taxation and the tax treatment of the financial sector. 2013.-217, pages 109-110.
http://www.oecd.org/tax/tax-global/ITD-publication-decade-sharing-experiences.pdf
[4] Procedures for the privatization of the tax debt capitalization methods. Rules of the Cabinet of Ministers of the Latvian Republic. Nr.986. Riga, December 2, 2008 - paragr.7.2.- only in Latvian: http://likumi.lv/doc.php?id=184814
[5 ] Jonathan Farrar, Amin Mawani. Debt-Equity Limitations in Thin Capitalization Rules: Canadian Evidence. Social Science Research Network. January 4, 2008.- 38p. (CAAA) 2008 Annual Conference Paper
[6] Winn, Courtney D., Optimal debt-‐to-‐equity ratios and Stock Retorns. (2014). All Graduate Plan B and other Reports. Paper 363./Utah State University. – page 23 http://digitalcommons.usu.edu/gradreports/363
[7]The Commercial Law. The law of Latvian republic.04.05.2000 (with amendments to 16.01.14.//Text consolidated by Latvian State Language Centre). - Sections 197(5), 250(4), 198(1)8.
http://www.vvc.gov.lv/advantagecms/LV/meklet/meklet_dokumentus.html?query=+The+Commercial+Law+of+Latvia&Submit=Mekl%C4%93t&resultsPerPage=10
[8] Strupišs, Aigars. Commentary on the Commercial Law. Komerclikuma komentāri.III.Rīga.„A. Strupiša juridiskais birojs”,SIA.2003.-335. Pages 86, 87,101-103
[9] Manuel Kapsis. Financial Instruments with Characteristics of Equity research project. Project Plan. IASB Agenda ref.13B. April 2014. IASB Meeting. STAFF PAPER. -9, page2 ph7, page 4 ph 11, page 23.. http://www.ifrs.org/Meetings/MeetingDocs/IASB/2014/April/AP13B-FI.pdf
[10] Manuel Kapsis. Financial Instruments with Characteristics of Equity research project. Project status and scopе. IASB Agenda ref.5B. May 2015. IASB Meeting. STAFF PAPER. -7. page 3, thesis 8.
http://www.ifrs.org/Meetings/MeetingDocs/IASB/2015/May/AP05B-FICE.pdf
[11] Firas Aziz M. Jawad, Xinping Xia. International Financial Reporting Standards and Moral Hazard of Creative Accounting on Hedging. International Journal of Finance and Accounting 2015, 4(1): 60-70, page 61,
http://article.sapub.org/10.5923.j.ijfa.20150401.06.html
[12] Georg Wamser. The Impact of Thin- Capitalization Rules on External Debt Usage – A Propensity Score Matching Approach. Ifo Working Paper No. 62.October 2008. http://www.cesifo-group.de/pls/guest/download/Ifo%20Working%20Papers%20(seit%202005)/IfoWorkingPaper-62.pdf
[13] Commercial Code. Act of the Republic of Estonia, passed 15 February 1995, entered into force 1 September 1995. (RT1 I 1995, 26/28, 355; consolidated text RT I 2005, 63, 481), Translation publihed 16.06.2015. – article 194.1.
https://www.riigiteataja.ee/en/eli/ee/Riigikogu/act/516062015010/consolide
[14] DIRECTIVE 2012/30/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 25 October 2012. - Document 32012L0030. Official Journal of the European Union. 14.11.2012 – аrticles 9-10.
http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex:32012L0030
[15] IAS Plus apdate. FRIC clarifies accounting for debt for equity swaps. Deloitte. December 2009.-4. Page 1 http://www.iasplus.com/en/binary/iasplus/0912ifric19.pdf
[16] Extinguishing financial liabilities with equity instruments. EYGM Limited. ey.com/IFRS. Issue 62 / November 2009. Supplement to IFRS outlook.-pages 1-2. https://www2.eycom.ch/publications/items/ifrs/olk/200911_supplement_62/200911_supplement_ifrs_outlook_62.pdf
[17] Extinguishing Financial Liabilities with Equity Instruments. HK(IFRIC). Interpretation 19.Hong Kong Institute of Certified Accountants.2014.-13. Page8-BC4 http://app1.hkicpa.org.hk/ebook/HKSA_Members_Handbook_Master/volumeII/hk%28ifric%29-int%2019.pdf
[18] Financing transactions: debt, equity and instruments in between.2014. Second edition, March 2015.PWH-333 – page101 http://www.pwc.com/en_US/us/cfodirect/assets/pdf/accounting-guides/pwc-guide-financing-transactions-debt-equity-second-edition-2015.pdf
[19] Vittorio Salvadori di Wiesenhoff and Roberto Egori. Tax Issues in Consensual Debt Restructuring. In „DERIVATIVES & FINANCIAL INSTRUMENTS– SPECIAL ISSUE. ” SEPTEMBER 2012. Еd. Machiel Lambooij. IBFD. 36-43,р.41 http://www.freshfields.com/uploadedFiles/SiteWide/Knowledge/IBFD%20Special%20Issue%20-%20Consensual%20debt%20restructuring.pdf