Is sharewarrant a liability or equity

To finance exploration activities, ABC Ltd. (the issuer), entered into a $1,000,000 private placement of units. Each unit comprises one common share and one share purchase warrant in ABC Ltd. Each share purchase warrant has a fixed exercise price denominated in Canadian dollars and is convertible into a fixed number of shares. ABC Ltd. has a Canadian dollar functional currency. The fair value for the shares at the date of issue is $800,000.

he share purchase warrants are classified as equity instruments because a fixed amount of cash is exchanged for a fixed amount of equity. In this example, no other features exist that would result in financial liability classification. Applying a residual approach, the following journal entries are recorded by ABC Ltd. (excluding tax consequences, if any): Initial recognition & measurement

Dr. Cash $1,000,000

Cr. Equity (Warrant Reserve or Contributed Surplus) $200,000

Cr. Equity (Share Capital) $800,000

WHEN IT IS IN FOREIGN CURRENCY EXCHANGE INVOLVED

The share purchase warrants are classified as a financial liability. Although the conversion amount in foreign currency may be fixed, when converted back to ABC Ltd.’s Canadian functional currency, it results in a variable amount of Canadian dollar denominated cash (that is, a variable carrying amount for the financial liability that arises from changes in exchange rates), and hence the instrument fails the “fixed for fixed” criteria for equity classification. The following journal entries are recorded by XYZ Ltd. (excluding tax consequences, if any): Initial recognition & measurement:

Dr. Cash $1,000,000

Cr. Financial Liability $400,000

Cr. Equity (Share Capital) $600,000

Subsequent measurement (assuming an increase in value of warrants)

Dr. Expense - Fair Value Movement $XXX

Cr. Financial Liability $XXX

NEXT THERE ARE SOME ACCOUNTING STANDARDS THAT MENTION, YOU CAN CLASSIFY ANYTHING AS ONLY EQUITY WHEN IT DOESNT HAVE ANY OBLIGATION TO DELIVER CASH OR SHARES TO OTHERS. THAT IS WHY IN THE FIRST ENTRY 200 $ IS NOT TAKEN TO EQUITY BUT TAKEN TO RESERVES. 

EX: PREF SHARES PAYING DIVIDEND IS NOT CLASSIFIED AS EQUITY. WHEN THEY DONT HAVE TO PAY DIVIDENDS, ITS EQUITY. SO YOUR BALANCE SHEET. FINALLY, FINANCIAL LIABILITIES ARE MEASURED AT FVTPL (TRADING) OR AMORTISED COSTS FOR INDAS AND AS. WARRANTS ARE NOT DEBT INSTRUMENTS TO AMORTISE NOR TRADING INSTRUMENTS. ILL GET BACK WITH OTHER FINE EXAMPLES

Whether Share Warrants Shares or other Securities under the Companies Act, 2013

In general terms a share warrants are not shares but a right or interest in shares. This simple definition makes share warrant other securities.

However, Explanation (ii) to sub – rule (1) of Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 has indirect mention of share warrant. It reads, “For the purposes of this rule (Rule 13), the expression, “shares or other securities” means equity shares, fully convertible debentures, partly convertible, debentures or any other securities,

Other securities= share warrants.

In view of the above, we can opine that money received against share warrants are disclosed separately in the balance sheet under ‘Shareholder funds’ and does not form part of paid-up share capital unless and until converted into shares. 

You will get a diluted EPS if the exercise price is lower than fair value of the warrant today. Now, for the time being, the reporting is done on fair value of the share as per AS. During the transaction/exchange time, the loss or gain will be taken to profit or loss. Hence, no need to report a liability.  

Bank a/c 1000

To Share capital a/c 500

To Share warrant reserves a/c 500

if the price of the warrants reduce on the settlement date, it will be reflecting in the final call money and hence no loss will arise. This is something I realised now. the above 500 is nothing but premium+allotment money. The ups and down of share price will be adjusted, say it fell to 300 total

Bank a/c 300

To Final call a/c 300

So the total paid up capital for warrants is 500+300.

The above is one way you can design terms and conditions. Then another way of doing this is you will lock in a warrant along with it and prone to trading fluctuations

Bank a/c 1000

To Share capital 500 

To Share warrant reserves 500

when the final price falls to fifty paise of this lot which was initially one rupee

By Share capital reserves 500

By loss a/c 250

To Share capital a/c 250

This is because, warrants can be issued for money or for free like bonus issues. When the price falls, the loss becomes free kind of issue. My guess is if one for three shares is a warrant worth one rupee. Then 500*new price is fifty paise divided by old price at issue. it becomes 250. 

Finally, The loss I mentioned about is nothing but the money you have to refund.

So

Share warrant a/c 250

To Payables/creditors account 250

All right. You have a point here. How can a company take one rupee and give fifty paisa share to you and keep the profit? So, this liability will arise when there is a price fluctuation. The same as above currency transaction fluctuation in first example. Interesting. 

My conclusion about it is, if it an option, we have to use hedging technique. If it is a normal warrant promising a share and charged little amount of money only, then it can be adjusted in final call and 500 in reserves can be adjusted to 250 when the intrinsic value of the share falls. 

Share warrants a/c 250

To Revaluation loss a/c 250 or else why will you keep it in reserves?

So warrants are customised I guess and only company CA will know the terms of its issue. Have a nice weekend. I hope you did not find my analysis too erratic.