FAS 150 is the FASB standard, now codified as ASC 480, that requires companies to classify certain financial instruments as liabilities on the balance sheet even when those instruments carry the legal form of equity. It targets shares and contracts that create an unavoidable obligation for the issuer to transfer cash or other assets, most commonly mandatorily redeemable preferred stock and written put options on the company’s own shares. The Financial Accounting Standards Board issued Statement No. 150 in May 2003, and it took effect for instruments entered into or modified after May 31, 2003.1FASB. Summary of Statement No. 150 The rule has since been folded into the FASB codification as Accounting Standards Codification Topic 480.
The core principle is straightforward: if a financial instrument embodies an obligation of the issuer, it must be classified as a liability (or in limited cases an asset), regardless of its legal form.2Deloitte Accounting Research Tool. Distinguishing Liabilities From Equity – Chapter 1 Overview A share of preferred stock the company must redeem in five years is, economically, a loan, and FAS 150 makes the accounting reflect that.
The Three Categories of Instruments Covered
FAS 150 applies to three specific types of freestanding financial instruments. Because the standard reaches only freestanding instruments, features embedded inside a larger instrument are analyzed under different guidance.3Deloitte Accounting Research Tool. Instruments
Mandatorily Redeemable Instruments
The first category covers instruments that the issuer has an unconditional obligation to redeem by transferring cash or other assets, whether on a fixed date or upon an event certain to occur.2Deloitte Accounting Research Tool. Distinguishing Liabilities From Equity – Chapter 1 Overview Mandatorily redeemable preferred stock is the classic example. Because the company cannot avoid the future cash outflow, the instrument behaves like a term loan whatever it is called.
One carve-out matters here. If redemption happens only upon liquidation or termination of the entity, the instrument is not a liability under FAS 150.4Deloitte Accounting Research Tool. Classification Liquidation-only redemption features are treated as inherent to all equity.
Obligations to Repurchase Equity
The second category captures instruments other than outstanding shares that obligate the issuer to buy back its own equity, where settlement involves transferring assets.2Deloitte Accounting Research Tool. Distinguishing Liabilities From Equity – Chapter 1 Overview A written put option on the company’s own stock is the common case: if the holder can force the company to buy shares back for cash, the company holds a potential obligation to transfer assets. Forward purchase contracts on the company’s own shares fall into the same bucket.
The obligation here sits in a separate contract rather than in the share itself, and the trigger can be conditional. That does not save it from liability classification.
Variable Share Obligations
The third category covers instruments that obligate the issuer to deliver a variable number of its own equity shares, where the monetary value of the obligation follows one of three patterns:
- A fixed monetary amount. The issuer owes a set dollar value and will settle it in however many shares that amount buys at settlement, such as preferred shares that mandatorily convert into common shares worth exactly $100,000 regardless of the common stock price.
- A value indexed to something other than the issuer’s own stock, such as a commodity price or market index, settled in a variable number of the issuer’s shares.
- A value inversely related to the issuer’s share price, so the obligation grows as the stock falls. Written put options that permit net share settlement are typical.
In each case the issuer is delivering economic value rather than a residual ownership interest. For outstanding shares such as convertible preferred, FAS 150 reaches this category only when the conversion obligation is unconditional; a conversion triggered by a contingent event like an IPO or change of control is outside the standard. For instruments other than outstanding shares, both conditional and unconditional obligations are covered.5Deloitte Accounting Research Tool. Classification
What Falls Outside the Standard
Several instruments that look like they belong in one of the three categories are actually scoped out, and missing an exception can produce misclassification in either direction.
Share-Based Compensation
Instruments accounted for under ASC 718 are generally excluded. Employee stock options, restricted stock, and similar awards follow their own classification framework.6Deloitte Accounting Research Tool. 5.2 ASC 480 A company still applies FAS 150’s criteria to freestanding instruments issued in a share-based payment transaction, and an instrument that leaves ASC 718’s scope can move into FAS 150’s.
Private Companies and Nonpublic Entities
Nonpublic entities that are not SEC registrants get meaningful relief. FAS 150 does not apply to their mandatorily redeemable instruments unless redemption occurs on a fixed date and the redemption amount is either fixed or tied to an external index such as an interest rate or currency benchmark.4Deloitte Accounting Research Tool. Classification A private company whose shares are redeemable at fair value upon a founder’s death does not classify those shares as liabilities, because neither the date nor the amount is fixed. Without this exception, most private-company equity structures would be forced into the liabilities section.
Business Combination Earn-Outs
Contingent consideration in an acquisition is classified under ASC 805, which has its own framework for the equity-versus-liability question and only references FAS 150’s criteria as an input.7Deloitte Accounting Research Tool. Roadmap: Business Combinations – 5.7 Contingent Consideration Amounts tied to post-acquisition employment are treated as compensation expense, not contingent consideration.
How Covered Instruments Are Measured
All instruments classified as liabilities under FAS 150 are initially recognized at fair value.2Deloitte Accounting Research Tool. Distinguishing Liabilities From Equity – Chapter 1 Overview Subsequent measurement then depends on the instrument.
Mandatorily redeemable instruments are measured using accretion rather than fair value. The carrying amount rises from the initial recognition amount toward the mandatory redemption price over the life of the instrument, and each period’s increase is recorded as interest expense on the income statement. That is a meaningful shift from the dividend treatment these shares would have received before reclassification, because dividends reduce retained earnings without touching net income while interest expense does.
Written put options, variable share obligations, and most other covered instruments are remeasured at fair value each reporting period, with changes flowing through earnings. Physically settled forward contracts to repurchase a fixed number of shares follow separate measurement guidance.
What Reclassification Does to the Financial Statements
Moving an instrument from equity into liabilities is not a labeling exercise. Total equity falls and total liabilities rise by the same amount, and the debt-to-equity ratio moves accordingly. For a company operating near a covenant limit in its loan agreements, the shift can produce a technical default even though nothing about the company’s cash position has changed.
The income statement moves too. Payments that would have been reported as preferred dividends now run through as interest expense, reducing net income and earnings per share. For issuers with sizable mandatorily redeemable preferred stock, the effect on reported profitability can be visible from period to period.
Required Disclosures
FAS 150 requires footnote disclosures that give readers enough context to interpret the reclassified balances:
- The nature and terms of each instrument, including what triggers redemption or repurchase and any attached conditions.
- The carrying amount of each instrument classified as a liability under the standard.
- The settlement alternatives, including whether the issuer can settle in cash, shares, or other assets, and any options the holder holds.
- If cash settlement is required, the maximum amount the company would need to pay.2Deloitte Accounting Research Tool. Distinguishing Liabilities From Equity – Chapter 1 Overview
The disclosures do practical work for readers. A balance-sheet line by itself does not reveal whether the company faces an imminent cash drain or a redemption a decade out, and analysts calculating coverage ratios or assessing credit need to separate FAS 150 liabilities from conventional debt.