{"schema_version":2,"canonical_url":"https://asc.understandingaccounting.org/asc/480/10/#05-overview-and-background","source":"FASB Accounting Standards Codification, Basic View","usage":"Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective.","topic":"480","topic_title":"Distinguishing Liabilities from Equity","subtopic":"480-10","subtopic_title":"Overall","section":{"number":"05","label":"05 Overview and Background","anchor":"05-overview-and-background","is_sec":false,"groups":[{"block":null,"heading":null,"paragraphs":[{"citation":"480-10-05-1","para":"05-1","html":"<div class=\"asc-body\"><div class=\"norm-text\">The Codification contains separate Topics for liabilities and equity, including a separate Topic for debt. The Distinguishing Liabilities from Equity Topic contains only the Overall Subtopic. <span class=\"sfragment\" id=\"sfr_6493069D-6E93-1014-A13F-6E4B94C84136\"><span class=\"sfragment-source\">This Subtopic establishes standards for how an <a href=\"/glossary/i/#issuer\" class=\"term\" title=\"The entity that issued a financial instrument or may be required under the terms of a financial instrument to issue its equity shares.\"><span>issuer</span></a> classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. Section <a altsource=\"GUID-2DEB7D6D-D0BB-4449-A4E7-B11E67B5CAC9.ditamap\" class=\"ditamap\">480-10-25</a> requires that an issuer classify a <a href=\"/glossary/f/#financial-instrument\" class=\"term\" title=\"Cash, evidence of an ownership interest in an entity, or a contract that both: Imposes on one entity a contractual obligation either: To deliver cash or another financial instrument to a second entity To exchange other financial instruments on potentially unfavorable terms with the second entity. Conveys to that second entity a contractual right either: To receive cash or another financial instrument from the first entity To exchange other financial instruments on potentially favorable terms with the first entity. The use of the term financial instrument in this definition is recursive (because the term financial instrument is included in it), though it is not circular. The definition requires a chain of contractual obligations that ends with the delivery of cash or an ownership interest in an entity. Any number of obligations to deliver financial instruments can be links in a chain that qualifies a particular contract as a financial instrument. Contractual rights and contractual obligations encompass both those that are conditioned on the occurrence of a specified event and those that are not. All contractual rights (contractual obligations) that are financial instruments meet the definition of asset (liability) set forth in FASB Concepts Statement No. 6, Elements of Financial Statements, although some may not be recognized as assets (liabilities) in financial statements—that is, they may be off-balance-sheet—because they fail to meet some other criterion for recognition. For some financial instruments, the right is held by or the obligation is due from (or the obligation is owed to or by) a group of entities rather than a single entity. (P) December 16, 2024; (N) December 16, 2025105-10-65-9Cash, evidence of an ownership interest in an entity, or a contract that both: Imposes on one entity a contractual obligation either: To deliver cash or another financial instrument to a second entity To exchange other financial instruments on potentially unfavorable terms with the second entity. Conveys to that second entity a contractual right either: To receive cash or another financial instrument from the first entity To exchange other financial instruments on potentially favorable terms with the first entity. The use of the term financial instrument in this definition is recursive (because the term financial instrument is included in it), though it is not circular. The definition requires a chain of contractual obligations that ends with the delivery of cash or an ownership interest in an entity. Any number of obligations to deliver financial instruments can be links in a chain that qualifies a particular contract as a financial instrument. Contractual rights and contractual obligations encompass both those that are conditioned on the occurrence of a specified event and those that are not. Some contractual rights (contractual obligations) that are financial instruments may not be recognized in financial statements—that is, they may be off-balance-sheet—because they fail to meet some other criterion for recognition. For some financial instruments, the right is held by or the obligation is due from (or the obligation is owed to or by) a group of entities rather than a single entity.\"><span>financial instrument</span></a> that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an <a href=\"/glossary/o/#obligation\" class=\"term\" title=\"A conditional or unconditional duty or responsibility to transfer assets or to issue equity shares. Because Topic 480 relates only to financial instruments and not to contracts to provide services and other types of contracts, but includes duties or responsibilities to issue equity shares, this definition of obligation differs from the definition found in FASB Concepts Statement No. 6, Elements of Financial Statements, and is applicable only for items in the scope of that Topic. (P) December 16, 2024; (N) December 16, 2025105-10-65-9A conditional or unconditional duty or responsibility to transfer assets or to issue equity shares. This definition is applicable only for items within the scope of Topic 480.\"><span>obligation</span></a> of the issuer. </span></span></div></div>","snippet":"The Codification contains separate Topics for liabilities and equity, including a separate Topic for debt. The Distinguishing Liabilities from Equity Topic contains only the Overall Subtopic. This Subtopic establishes st…","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:e0f99807d4e2173f4ed14fde14eca40bb47012e909a87fe2dcb5718414e9d635","downloaded_from":"2026-09-10T00:35:29.839Z","last_downloaded_at":"2026-09-10T00:35:29.839Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147481882","source_sha256":"21b2057c36312c67da5e1f9985113357066e224f034c44759e407f22d8274761"}},{"citation":"480-10-05-2","para":"05-2","html":"<div class=\"asc-body\"><div class=\"norm-text\">All of the following are examples of an obligation:<ol class=\"ol-norm\"><li class=\"li-norm\"><span class=\"linum\">a</span><div class=\"p\"><span class=\"sfragment\" id=\"sfr_6493084F-6E93-1014-A13F-6E4B94C84136\"><span class=\"sfragment-source\">An entity incurs a conditional obligation to <a href=\"/glossary/t/#transfer\" class=\"term\" title=\"The term transfer is used in a broad sense consistent with its use in FASB Concepts Statement No. 6, Elements of Financial Statements (such as in paragraph 137), rather than in the narrow sense in which it is used in Subtopic 860-10. (P) December 16, 2024; (N) December 16, 2025105-10-65-9The term transfer is used in a broad sense, rather than in the narrow sense in which it is used in Subtopic 860-10.\"><span>transfer</span></a> assets by issuing (writing) a put option that would, if exercised, require the entity to repurchase its <a href=\"/glossary/e/#equity-shares\" class=\"term\" title=\"Equity shares refers only to shares that are accounted for as equity.\"><span>equity shares</span></a> by <a href=\"/glossary/p/#physical-settlement\" class=\"term\" title=\"A form of settling a financial instrument under which both of the following conditions are met: The party designated in the contract as the buyer delivers the full stated amount of cash or other financial instruments to the seller. The seller delivers the full stated number of shares of stock or other financial instruments or nonfinancial instruments to the buyer.\"><span>physical settlement</span></a>. </span></span><span class=\"sfragment\" id=\"sfr_649309A5-6E93-1014-A13F-6E4B94C84136\"><span class=\"sfragment-source\">(Further, an instrument that requires the issuer to settle its obligation by issuing another instrument [for example, a note payable in cash] ultimately requires settlement by a transfer of assets.) </span></span></div></li><li class=\"li-norm\"><span class=\"linum\">b</span><div class=\"p\"><span class=\"sfragment\" id=\"sfr_64930AE1-6E93-1014-A13F-6E4B94C84136\"><span class=\"sfragment-source\">An entity incurs a conditional obligation to transfer assets by issuing a similar contract that requires or could require <a href=\"/glossary/n/#net-cash-settlement\" class=\"term\" title=\"A form of settling a financial instrument under which the entity with a loss delivers to the entity with a gain cash equal to the gain.\"><span>net cash settlement</span></a>. </span></span></div></li><li class=\"li-norm\"><span class=\"linum\">c</span><div class=\"p\"><span class=\"sfragment\" id=\"sfr_64930C01-6E93-1014-A13F-6E4B94C84136\"><span class=\"sfragment-source\">An entity incurs a conditional obligation to issue its equity shares by issuing a similar contract that requires <a href=\"/glossary/n/#net-share-settlement\" class=\"term\" title=\"A form of settling a financial instrument under which the entity with a loss delivers to the entity with a gain shares of stock with a current fair value equal to the gain.\"><span>net share settlement</span></a>. </span></span></div></li></ol></div></div>","snippet":"All of the following are examples of an obligation:\n(a) An entity incurs a conditional obligation to transfer assets by issuing (writing) a put option that would, if exercised, require the entity to repurchase its equity…","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:4d0013610f17221e75d1945c7a2fce5b6cc76066286082b9ed274bd78b180a94","downloaded_from":"2026-09-10T00:35:29.839Z","last_downloaded_at":"2026-09-10T00:35:29.839Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147481882","source_sha256":"21b2057c36312c67da5e1f9985113357066e224f034c44759e407f22d8274761"}},{"citation":"480-10-05-3","para":"05-3","html":"<div class=\"asc-body\"><div class=\"norm-text\"><span class=\"sfragment\" id=\"sfr_64930D3B-6E93-1014-A13F-6E4B94C84136\"><span class=\"sfragment-source\">In contrast, by issuing <a href=\"/glossary/s/#shares\" class=\"term\" title=\"Shares includes various forms of ownership that may not take the legal form of securities (for example, partnership interests), as well as other interests, including those that are liabilities in substance but not in form. (Business entities have interest holders that are commonly known by specialized names, such as stockholders, partners, and proprietors, and by more general names, such as investors, but all are encompassed by the descriptive term owners. Equity of business entities is, thus, commonly known by several names, such as owners' equity, stockholders' equity, ownership, equity capital, partners' capital, and proprietorship. Some entities [for example, mutual organizations] do not have stockholders, partners, or proprietors in the usual sense of those terms but do have participants whose interests are essentially ownership interests, residual interests, or both.)\"><span>shares</span></a> of stock, an entity generally does not incur an obligation to redeem the shares, and, therefore, that entity does not incur an obligation to transfer assets or issue additional equity shares. </span></span><span class=\"sfragment\" id=\"sfr_64930E63-6E93-1014-A13F-6E4B94C84136\"><span class=\"sfragment-source\">However, some issuances of stock (for example, mandatorily redeemable preferred stock) do impose obligations requiring the issuer to transfer assets or issue its equity shares. </span></span></div></div>","snippet":"In contrast, by issuing shares of stock, an entity generally does not incur an obligation to redeem the shares, and, therefore, that entity does not incur an obligation to transfer assets or issue additional equity share…","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:442af1689961942f872ffc93b4f8f7d6d617b4754533b944460ae59d9a8d052f","downloaded_from":"2026-09-10T00:35:29.839Z","last_downloaded_at":"2026-09-10T00:35:29.839Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147481882","source_sha256":"21b2057c36312c67da5e1f9985113357066e224f034c44759e407f22d8274761"}},{"citation":"480-10-05-4","para":"05-4","html":"<div class=\"asc-body\"><div class=\"norm-text\"><span class=\"sfragment\" id=\"sfr_64930F98-6E93-1014-A13F-6E4B94C84136\"><span class=\"sfragment-source\">For certain financial instruments, Section <a altsource=\"GUID-2DEB7D6D-D0BB-4449-A4E7-B11E67B5CAC9.ditamap\" class=\"ditamap\">480-10-25</a> requires consideration of whether <a href=\"/glossary/m/#monetary-value\" class=\"term\" title=\"What the fair value of the cash, shares, or other instruments that a financial instrument obligates the issuer to convey to the holder would be at the settlement date under specified market conditions.\"><span>monetary value</span></a> would remain fixed or would vary in response to changes in market conditions. </span></span></div></div>","snippet":"For certain financial instruments, Section 480-10-25 requires consideration of whether monetary value would remain fixed or would vary in response to changes in market conditions.","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:637be99104cad16f6e66da1e7c92ed2f6dbb1d1aadf100c15b79287dda657ba9","downloaded_from":"2026-09-10T00:35:29.839Z","last_downloaded_at":"2026-09-10T00:35:29.839Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147481882","source_sha256":"21b2057c36312c67da5e1f9985113357066e224f034c44759e407f22d8274761"}},{"citation":"480-10-05-5","para":"05-5","html":"<div class=\"asc-body\"><div class=\"norm-text\"><span class=\"sfragment\" id=\"sfr_649310B3-6E93-1014-A13F-6E4B94C84136\"><span class=\"sfragment-source\">How the monetary value of a financial instrument varies in response to changes in market conditions depends on the nature of the arrangement, including, in part, the form of settlement. </span></span></div></div>","snippet":"How the monetary value of a financial instrument varies in response to changes in market conditions depends on the nature of the arrangement, including, in part, the form of settlement.","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:bcc084aac8a6b29777afa5cd38017a7a91ba437b21e8677d84089a3e8942f1da","downloaded_from":"2026-09-10T00:35:29.839Z","last_downloaded_at":"2026-09-10T00:35:29.839Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147481882","source_sha256":"21b2057c36312c67da5e1f9985113357066e224f034c44759e407f22d8274761"}},{"citation":"480-10-05-6","para":"05-6","html":"<div class=\"asc-body\"><div class=\"norm-text\"><span class=\"sfragment\" id=\"sfr_649311DE-6E93-1014-A13F-6E4B94C84136\"><span class=\"sfragment-source\">For purposes of this Subtopic, three related terms—shares, equity shares, and <a href=\"/glossary/i/#issuer-s-equity-shares\" class=\"term\" title=\"The equity shares of any entity whose financial statements are included in the consolidated financial statements.\"><span>issuer's equity shares</span></a>—are used in the particular ways defined in the glossary. </span></span></div></div>","snippet":"For purposes of this Subtopic, three related terms—shares, equity shares, and issuer's equity shares—are used in the particular ways defined in the glossary.","pending":false,"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:f71190af6a320b1071e58aca5adf5a3c143b8669a727eeef157aac018cf5c542","downloaded_from":"2026-09-10T00:35:29.839Z","last_downloaded_at":"2026-09-10T00:35:29.839Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not established by retrieval timestamps","source_key":"1943274/2147481882","source_sha256":"21b2057c36312c67da5e1f9985113357066e224f034c44759e407f22d8274761"}}],"provenance":{"source_url":"https://asc.fasb.org/","snapshot_version":"sha256:15aea8165dff9f5ae47d9484f8470588b13b307f56e1d50801bf4d85ec190e3f","record_version":"sha256:183fb1301236ca938abc8429c184fbb399e0c628ada8ed970a1b8fd2f47b2d07","downloaded_from":"2026-09-10T00:35:29.839Z","last_downloaded_at":"2026-09-10T00:35:29.839Z","date_scope":"source_page","effective_as_of":null,"effective_as_of_status":"Not 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