On 28 February 2008 the IASB published a discussion paper Financial Instruments with Characteristics of Equity. The discussion paper was open for comment until 5 September 2008.

In October 2008 the IASB discussed the comment letters received, and which approach provided the best starting point. The IASB and FASB decided to begin future deliberations using the principles underlying the perpetual and basic ownership approaches.

After exploring many different approaches, the boards have developed a model where classification is based on the form of an instrument’s settlement, assets (eg cash) or its own equity instruments (eg shares).

For instruments that the issuer settles with assets:
1. Classify as equity if asset-settlement occurs because of the following reasons:
     a) on distribution of all of its assets (such as bankruptcy)
     b) the issuer chooses to pay a dividend or repurchase shares
     c) redemption allows existing instrument holders to maintain control of the entity
     d) the holder ceases to participate in the activities of the entity
2. All other asset-settled instruments are classified as liabilities.

For instruments that the issuer settles with its own equity instruments:
1. A contract for a specified number of its own equity instruments in exchange for a specified price are classified as equity
     – Specified number must be fixed or vary as an anti-dilution measure
     – Specified price must be in the functional currency of the reporting entity or shareholder
2. All other equity-settled instruments are classified as liabilities

Instruments with both liability and equity features will be separated into liability and equity components. For example, ordinary shares with required dividend payments, debt convertible at the option of holder into a specified number of ordinary shares.