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What method should be used to determine the FMV of a warrant for accounting purposes?

Marcia Miller's Profile

I've generally valued stock options using black-scholes, and restricted stock units at intrinsic value (price of the underlying stock less grant price) for public companies. I'm not sure if a warrant should be valued with black-scholes or at intrinsic value.

Answers

Michael Brown
Title: Vice President
Company: Teknos Associates LLC
(Vice President, Teknos Associates LLC) |

Although there are some differences between options and warrants (there generally is an option pool, while new shares are issued upon the exercise of warrants), the value of company issued options and warrants can be calculated the same way. As as a result, the most appropriate method to value stock options is the Black-Scholes option pricing model.

Marcia Miller
Title: Chief Financial Officer
Company: Energy Focus, Inc.
(Chief Financial Officer, Energy Focus, Inc.) |

Thanks Michael. If the warrant vests immediately and has an exercise period of three years, is the expense spread over the three year period? If it were an option it would be expensed over the vesting period, which would be immediately in this case.

Topic Expert
Bob Stenz
Title: Controller
Company: Silicon Valley start-up
(Controller, Silicon Valley start-up) |

If you're having a 409A study done (...annually is generally advised as a minimum to avoid a cheap stock judgment by the IRS) you can have the warrants included which will provide you a FMV.

Chris Kondo
Title: Consultant
Company: RoseRyan Inc.
(Consultant, RoseRyan Inc.) |

Unfortunately I think treatment on warrants will vary. Generally FV using black scholes is the valuation method. But there is intrinsic value treatment as well under certain situations. Whether the warrant was issued with debt also triggers a its own decision tree. However you value it there would also be consideration of whether it is equity or liability.
I would suggest a June 2013 FRD issued by EY called "issuers Accounting for debt & equity financings". It has many flowcharts and pretty comprehensive discussion of all kinds of instruments including warrants issued with debt and examples.

Jim Hinkel
Title: CFO
Company: RyMed Technologies
LinkedIn Profile
(CFO, RyMed Technologies) |

The only thing I can add to what others have already shared is that my company issued warrants as a bridge debt sweetener where the quantity of warrants the note holder would receive was dependent on a price formula used to determine how many shares they would receive if they converted the debt into preferred shared following a planned qualified financing. Our auditors position was that these were derivatives, which took us in a different direction in determining FMV and accounting treatment. Should you have a similar set of circumstances, I'd recommend that you consult with your audit partner.

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