The accounting treatment for detachable warrants is a complicated area. Presumably you are asking about detachable warrants issued in conjunction with a debt instrument.
The first step is to allocate the proceeds to the debt instrument and the warrants, based on their relative fair values ASC Next you will need to determine whether the warrants are classified as equity or liabilities.
There is a good discussion of this process in the SEC Staff's Current Issues and Rulemaking Projects - copied below:. Since warrants are freestanding instruments, the warrants should be analyzed to determine whether they meet the definition of a derivative under SFAS paragraphs 6 -9and if so, whether they meet the scope exception in paragraph 11 of SFAS If the warrant does not meet the definition of a derivative under SFASit must be evaluated under EITF to determine whether the instrument should be accounted for as a liability or as equity.
In order to determine that equity classification of the contract is appropriate, all of the criteria for equity classification in paragraphs of EITF must be met.
These criteria relate to contract terms, not the likelihood of any particular term being triggered. Failure to meet any of these criteria results in classification of the contract as a liability.
GAAP: How to Classify Warrants | omotohu.web.fc2.com
While all of the criteria in paragraphs should be analyzed, the most common reasons for a conclusion to account for warrants as liabilities are:. The liquidated damages usually are expressed as a percentage of the original amount invested by the holder and may or may not be capped at a certain maximum percentage. In Junethe EITF began deliberating the effect of a liquidated damages clause on a freestanding financial instruments, such as warrants.
The preliminary deliberations resulted in 4 alternative views see the deliberations of EITF Issue In Septemberthe FASB staff postponed further deliberations by the EITF until the FASB could address whether a separate registration rights agreement is a derivative under FASB SFAS On October 20,the FASB issued a proposed FSP, No.
EITF b Accounting for Registration Payment Arrangements see http: The proposed FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in tripp livestock market with FASB Statement No.
The comment period on the proposed FSP ends December 4, Until the final FSP is issued and adopted, registrants should continue to use their existing accounting policy consistently among all of their contracts, along with clear disclosure regarding the policy selected. Upon the issuance of the anticipated FSP, which for calendar year companies is expected to go into effect beginning with the first quarter ofregistrants should apply the transition guidance in the FSP. As previously mentioned, in analyzing instruments under EITFthe probability of the event occurring is not a factor.
Even if delisting is not considered probable of ever occurring, the warrants would still be classified as a liability under the EITF analysis. Similarly, the likelihood that a change in control could occur is not a factor. I agree that the accounting treatment for detachable warrants is a very complicated area and I would suggest that Jim's answer may not address all of the complexities.
I have written numerous white papers for clients related to specific warrant instruments and can say that the terms of the mathematical operations binary numbers will dictate the accounting and that seldom are warrants attached to different instruments identical.
You say that the warrants are detachable, but the accounting treatment will differ depending on natural health care stockton ca they are attached to a debt or equity instrument. In addition, you will first need to consider if the warrants are mandatorily redeemable.
The original pronouncement on this is SFASwhich you should cross reference to the Detachable warrants put option. If the warrants are not within the scope of SFASyou would proceed with the analysis under SFAS as indicated above. Detachable warrants put option the same time, it may be also be red option autotrade to consider the treatment of the conversion feature, if any, of the host debt or equity instrument.
In addition to the EITF references in Jim's answer, you may also need to consider the ASC cross references from EITFs indexing to an Entity's Own StockConvertible Securities with Beneficial Conversion Featuresand Application of Issue to Certain Convertible Instruments. If you determine that the warrant is a derivative instrument, you will also need to look at the ASC cross reference to DIG Issue B-6 for valuation allocation.
And, if yours is a public company, you should also look at ASR to see if you can find an exception.Why you should trade Structured Warrants
I also agree that the most common problem with accounting for warrants attached or not is a cash settlement clause at the option of the holder. I have seen these clauses most frequently buried in the instrument in conjunction with a change of control and generally they are clauses that apply only to the warrant holder and not to the other holders of equity instruments.
Warrant (finance) - Wikipedia
My best advice to clients when I see these clauses assuming that the issuance transaction has not been completed is to get rid of the clause. The removal is seldom a "deal breaker" and will avoid the headache of derivative accounting for the warrant until such time as it is exercised or has expired. Can anyone give me an example on how to record the detachable warrants as the "investor" on issuance date?
Discount on Bond, CR: Cash, but do you record anything for the fair value of the warrants? Browse our extensive library of free white papers focused on the latest financial, technology and business issues. Sign In Sign Up. Sign Up Sign In. Blogs White Papers Resources. What is the proper GAAP accounting treatment for detachable warrants? Stock Option Accounting US GAAP Warrants.
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