Defining Issues | October 2020

 

Insight

EITF discusses accounting for warrant modifications

EITF discusses accounting for modifications to equity-classified freestanding call options.

Kimber Bascom

Kimber Bascom

Partner, Dept. of Professional Practice, KPMG US

+1 212-909-5664

Michael Republicano

Michael Republicano

Senior Manager, Dept. of Professional Practice, KPMG US

+1 212-872-7816

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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