An Empirical Analysis of the Accounting, Regulation in Relation to Hybrid Financial Instruments for Small Entities

Linnea Hørdum & Julie Storgaard Sørensen

Student thesis: Master thesis


International trade has risen significantly in recent decades, especially due to the breakthrough of the Internet. The Internet has played an important role increasing cross‐border trade. Cross border trade is still increasing and places greater demands on companies' competitiveness in the global market. A key reason for promoting economic development is innovation. Growth through innovation is essential for both companies and society as a whole. The aftermath of the financial crisis has made it more difficult especially for entrepreneurs and small businesses to raise capital. Banks and other traditional lenders have tightened the criteria for lending. In order to maintain global competitiveness, entrepreneurs and small businesses may seek alternative forms of funding. As alternative funding is finding its way to small entities, it is relevant to discuss whether the accounting regulations are geared to handle the growth in the supply of financial instruments. Because of the rapid growth in the lending market, it has become a challenge to determine the correct classification of advanced financial instruments. The instruments may contain characteristics for both equity and liabilities. Based on the challenges regarding the complexity of financial instruments it is relevant to discuss whether the balance sheet provides a complete and faithful representation of the business capital structure and how the accounting regulations are addressing this challenge. The focus of this thesis is on small entities, which is why we will go through the accounting regulations that applies to them. This thesis' empirical analysis is based on the International Accounting Standard Board's projects regarding improvement of conceptual framework and reinforcing the distinction between liabilities and equity in the accounting standard IAS 32. We will identify elements in these projects ongoing discussion that will affect the classification and presentation of financial instruments. Based on these finding, we will set up a case based on the project boards findings to illustrate the implementation of their discussions and the outcome hereof. The analysis will be based on the theory for the accounting framework together with the theory behind the balance sheet's presentation of an entity's capital structure. We consider the accounting regulations to be inadequate in regards to handling the spread of alternative funding methods. The requirements are lacking clarity and are inconsistent which gives practical challenges. These challenges need to be addressed to ensure a higher use of alternative financial instruments.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2017
Number of pages110