EITF discusses accounting for warrant modifications
Defining Issues | October 2020
EITF discusses accounting for modifications to equity-classified freestanding call options.
FASB proposals would require an entity that modifies freestanding equity-classified forwards and options (including warrants) to apply a principles-based framework to determine the accounting treatment that best reflects the economic substance of the transaction. The amendments would apply to equity-classified forwards and options that are not in the scope of ASC 718 or accounted for as derivatives under ASC 815 that remain equity-classified after modification or exchange.
Applicability
Proposed ASU
- An entity that issues equity-classified forwards or options that:
- subsequently modify or exchange those forwards or options; and
- those forwards or options remain equity-classified after the modification or exchange
Relevant dates
- Exposure draft issued October 26, 2020
- Comments due December 28, 2020
Key Impacts:
The exposure draft proposes:
- A recognition model that would include four categories of transactions, each with a corresponding accounting treatment:
- Modifications or exchanges in connection with a financing transaction to raise equity
- Modifications or exchanges in connection with a financing transaction to raise or modify debt
- Modifications or exchanges in connection with a transaction to transfer goods or services in a reciprocal arrangement
- Other modifications or exchanges not related to financing or compensation.
- A measurement model that would require the value granted to the holder upon modification or exchange of the forward or option to be measured as: the excess of the fair value of the instrument immediately after the modification or exchange over the fair value of the instrument immediately before the modification or exchange.
- The ability for entities to early adopt, and to choose between either a prospective approach or a full retrospective approach upon adoption.
The exposure draft reflects the previous decisions of the consensus-for-exposure reached by the EITF in September 2020. In October 2020 the FASB further clarified that the amendments would apply to equity-classified forwards and options that are not in the scope of ASC 718 (stock compensation) or accounted for as derivatives under ASC 815 (derivatives and hedging).
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