In thinking about a financial instrument, issuers, financial intermediaries and their advisers have been

accustomed to considering the characteristics of the financial instrument. Does the financial instrument have

“equity-like” characteristics? Does the financial instrument behave more like debt? Sometimes evaluating the

equity-like traits and the debt-like traits of a financial instrument requires thinking about the same traits from

different perspectives—most often from at least four (though sometimes more) perspectives. From a legal, or

form, perspective, is the instrument structured as an equity security or as a debt security? From a tax perspective, is it debt? From a ratings agency perspective, does the instrument receive “equity credit” in recognition of its equity-like features? And, finally, from an accounting perspective, how will the financial instrument be treated on the issuer’s balance sheet? Financial innovation resulted in the development of more complex products, including instruments like convertible securities and hybrid securities, that have characteristics of debt and equity. These new products required closer analysis and often were difficult to classify for accounting purposes. Nonetheless, there is still an intuitive aspect to answering all of these questions—stock was equity and debt was debt.

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