Extinguishing Financial Liabilities with Equity Instruments: Theory and Practice Problems
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Abstract
EU introduced “fair value†accounting rules to evaluate equity instruments issued by the debtor for creditors to extinguish financial liabilities to them. These rules are not applied if the creditor is also a direct or indirect shareholder. This paper examines approaches to the evaluation debt when the shareholder’s liabilities are capitalized. Evaluation of those debts should include an audit of the documents related to incurring of debt, followed by an analysis of the debtor’s liquid assets to secure the debt. This is necessary to prevent the use of loopholes in legislation. Then the methods of business evaluation could be applied in any private enterprise.
Keywords: capitalization of debts, set-off of claims , fair value, income tax, “internal†liabilities
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