UNDER a proposed financial disclosure regime next year, Hong Kong firms may report higher gearing and may be less inclined to issue convertible bonds and preference shares. Coopers & Lybrand audit manager Daniel Yeung said the draft issued by the Hong Kong Society of Accountants entitled 'Financial Instruments: Disclosure and Presentation', would espouse substance over form in presenting the financial instruments on balance sheets, distinguishing clearly between debt and equity. 'This will affect the accounting treatment for certain preferred shares in particular,' Mr Yeung said. If the preference shares were redeemable on a fixed date, at a fixed amount, they resemble debt securities rather than equities and should be recorded as 'liabilities' and not under shareholders' funds. Mr Yeung said the company would then report a higher level of debts and lower net assets or shareholders' funds. The interest or dividend paid to these shareholders should be consistently presented in the profit and loss account. He said such dividends should be deducted from profit before tax rather than as a distribution to shareholders under the profit line. Another grey area is the treatment of convertible bonds with elements of equity and debt as they comprise a straight bond and an option for conversion into shares.