Next, I will go into details examining the problems found in these proposals and standard, especially FRS 4. Coming to this stage, I will divide the problems into two parts. Firstly, I will point out the inconsistency found in FRS 4 in relation to FRS 5. Secondly, I will try to deal with the practical point of view, pointing out that the FRS 4 consist of practical problems in accounting treatments for shares and debt.

Finally, I will conclude that the current standard for complex capital instruments is not sufficient to solve the problems found in its accounting treatments. Hence, a more effective standard must be put forward to regulate the accounting treatment for capital instruments as it is becoming increasingly more complex.

In many countries, accounting regulation is based on a system of detailed rules prescribed in standards and the law. However,

Van Horne, J. C. (1985), 'Of Financial Innovations and Excesses', Journal of Finance, July, pp. 621-631

Ernst and Young, UK GAAP, (5th edition), Mac Millan, 1997

Atul K. Shah, (1997), Regulatory Arbitrage Through Financial Innovation', Accounting, Auditing & Accountability Journal, Vol. 10, No. 1, pp. 85-104

FRS 4 dealing with capital instruments sets out to ensure that financial statements provide a clear, coherent and consistent treatment in particular with regard to their classification as debt, non- equity shares or equity shares. These are important distinctions and it is not surprising that the ASB's has not met with universal support. One of the key issues to be considered in FRS 4 must be the presentation of, and commercial rationale for, selecting capital instruments. On the whole, the disclosure requirements are voluminous and many could confuse readers. Finance directors will always seek instruments that can be treated as equity or quasi-equity in preference to debt. On the other hand, banker will continue to bend their minds to hybrids which avoid being treated as debt.

Now come to the question of practicality. Although the basic principles of the standard are relatively simple in nature, the implementation of its principles can be complex and fraught with practical problems. Let's consider the problems of accounting for shares under FRS 4. "Often non-equity shares have cumulative dividends that accrue to the non-equity shareholders even where there are no distributable reserves available out of which to make a distribution. The accounting treatment for cumulative dividends has been changed by FRS 4: before, they were merely noted in the financial statements. Under the FRS cumulative dividends form part of the share's finance costs and, as such, are charged to the P & L account with other finance costs to achieve a constant rate on the outstanding instrument. However, the standard did not mention about what should be done with the credit that arises as a result of charging the cumulative dividend to the P & L account as an appropriation when the company has no distributable profits. For instance, it could be credited to liabilities as a dividend payable, but this does not answer - the dividend cannot be declared without distributable reserves from which to make the payment."

Some common words found in the essay are:
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Approximate Word count = 2387
Approximate Pages = 10 (250 words per page double spaced)