Differences Between Capital Stock And Debts

Due to a fairly high rate of innovation and to more stringent regulatory requirements (capital adequacy ratio, etc.), it is becoming more and more difficult to clearly differentiate some debt instruments from capital stock instruments.

In order to give or restate a few guidelines, the French Institute of Chartered Accountants has recently published a position paper. Some efforts have also been made in this area at an international level (cf. Draft E 48 from IASC).

Capital stock is defined as follows: a financial instrument is considered as capital stock when the provisions of the contract and the business analysis of the issue combine the following features:

(1) the instrument is not reimbursable, redemption is under the exclusive control of the issuer or redemption is completed through the issuance or attribution of another capital stock instrument