Compound Financial Instruments and Hybrid Contracts

a Normative Essay Regarding Accounting and Tax Regulation Effects in Brazil

Abstract

Compound financial instruments (FI) and hybrid contracts have generated much controversy in accounting and legal matters. In Brazil, companies registered with the CVM, which used these instruments and classified them in shareholders’ equity, had their quarter and/or annual financial statements restated by determination of the regulator in previous years. The critical issue of the whole discussion, in the case of compound FI, lies in the distinction between a liability item and an equity item. The literature in this field is being gradually built up and, given its multidisciplinary nature, it is of interest to both lawyers and accountants who work in the tax and corporate areas. Some positive accounting researches present some hypotheses to explain the phenomenon, in particular the level of leverage. Papers in the law field likewise contribute to the literature on the subject and reveal a distance from the concepts adopted by the IFRS standard. Authors from the legal area are unanimous in affirming that tax legislation in Brazil is very superficial regarding the treatment to be given to compound FI and hybrid contracts. This normative essay seeks to explore aspects of IFRS and tax legislation, based on illustrative examples developed by the author, with the ability to shed light on possible economic motivations for accounting choices, feeding the research agenda of future studies. The essay explores the accounting dimensions of measurement, recognition and presentation, both for individual and consolidated financial statements. There are situations that do not find support in normative theory, such as the recognition of consolidated liabilities arising from transaction costs. This normative essay is expected to contribute to the learning of the subject and to contribute to the development of researches, if possible, interdisciplinary between the Law and Accounting areas.