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How do companies who issue warrants to third party investors account for the warrants in their financial statements?

Answers

Topic Expert
Kim Kovacs
Title: Executive Vice President
Company: Solium
(Executive Vice President, Solium) |

Warrants need to be disclosed separately from stock options and stock awards, and if they are for common stock and do not have complex features like anti-dilution protection you can value the warrant at issuance using Black-Scholes and the contractual term so long as they vest immediately. If the warrant is for preferred shares then you have to value the award at each reporting period, called mark-to-market, until they are settled, again using the contractual term and Black-Scholes. Warrants with complex terms, such as anti-dilution, should use an open valuation model (binomial or trinomial lattice).

Things to Consider:
- The Securities and Exchange Commission is scrutinizing the use of closed models like Black-Scholes to value complicated warrants
- Complex warrant features
- Anti-dilution or downround protections
- Allow early exercise

Guidance is in ASC 718-10-55

Phil Bolles
Title: Chief Financial Officer
Company: Global Commercial Strategies Group
(Chief Financial Officer, Global Commercial Strategies Group) |

Many corporations issue warrants in conjunction with hybrid debt or equity financing.

In addition to the measurement principles cited by Ms. Kovacs, the accounting for the such warrants may be as an equity instrument through APIC or a liability.

Liability accounting generally is indicated when the warrants contain terms that allow a cash settlement at the option of the holder. Certain downround protections may, by example, represent a deemed cash settlement.

If the warrants are equity issues for common stock, a one-time accounting is made at issuance as noted in Ms. Kovacs' response. If accounted for as a liability, the warrants must be remeasured each reporting period.

See ASC 815 and ASC 470 for accounting and measurement principles

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