An instrument labeled as a note is more likely to be considered to represent debt
FIXED MATURITY DATE
A fixed maturity date supports a debt classification.
REPAYMENTS TIED TO EARNINGS
If repayments are primarily tied to the ability to generate earnings, an equity classification is probable.
ABILITY TO DEMAND REPAYMENT OF ADVANCED FUNDS
The ability to demand repayment of advanced funds indicates a debt instrument.
PARTICIPATION IN MANAGEMENT
Equity classification would seem more likely if an instrument provided the ability to paritcipate in management.
Advances subordinate to other corporate loans are closer to equity.
INTENTION OF PARTIES
Classification of debt or equity should be impacted by the intent of the parties.
Instruments issued to a thinly capitalized business more closely resembles equity because creditors generally pursue more secured and safe investments.
PROPORTIONAL ADVANCES BY SHAREHOLDERS
Where shareholders advance funds in proportion to their equity positions, the instrument resembles equity.
INTEREST PAYMENTS DEPENDENT ON EARNINGS
Where interest payments are dependent on the availability of future earnings (such as dividend monies) is more likely to be considered equity.
ENTITY HAS ABILITY TO OBTAIN THIRD PARTY FINANCING
Evidence that a corporation could receive financing from other third party lenders increases the chance that an instrument will be classified as debt.
USE OF FUNDS FOR CAPITAL OUTLAYS
The use of funds for capital outlays indicates debt status, whereas their use for normal operating expenses represents equity status.
ACTIONS BY DEBTOR
Certain actions by the debtor such as its failure to repay on the due date or seeking a postponement demonstrates a lack of concern for making repayment indicating that the instrument is more equity like in nature.
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