In this essay, I would like to start with a brief explanation about the accounting regulation and standards set for various treatments consists of gaps where the rules are vague or even incomplete. Then, I would like to give a brief introduction about the development of standards set for capital instrument, such as TR677 (ICAEW), FRED 3 and FRS 4.
             Next, I will go into details examining the problems found in these proposals and standard, especially FRS 4. Coming to this stage, I will divide the problems into two parts. Firstly, I will point out the inconsistency found in FRS 4 in relation to FRS 5. Secondly, I will try to deal with the practical point of view, pointing out that the FRS 4 consist of practical problems in accounting treatments for shares and debt.
             Finally, I will conclude that the current standard for complex capital instruments is not sufficient to solve the problems found in its accounting treatments. Hence, a more effective standard must be put forward to regulate the accounting treatment for capital instruments as it is becoming increasingly more complex.
             In many countries, accounting regulation is based on a system of detailed rules prescribed in standards and the law. However, rule-based systems can rarely be water-tight. There may be gaps in the rules, and places where the rules are vague or even incomplete. Of equal, if not greater significance is the fact that regulatees may develop schemes which fulfil the letter of the rules, but undermine their spirit. Regulators may find themselves constantly lagging behind the avoidance activities of the regulatees (McBarnet, 1988). In such circumstances, effective regulation breaks down.
             For the past ten years, the financial instruments issued by companies have become more and more complex. This has been particularly so since October 1987 which has been a period where equity issues have been difficult and companies have not wanted to increase their capital gearing. ...