Treatment of unexercised share warrants

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derick1225
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Treatment of unexercised share warrants

Post by derick1225 »

Hi!

Asking for the treatment of unexercised share warrants. Say Company A wants to reclassify it to Retained Earnings.


We believe and based on reference materials from international publications, the unexercised share warrants should be reclassified to other equity account/component (e.g. Additional Paid in Capital).

Would you agree with Company A to reclassify it to Retained Earnings? If Yes, why?

Many thanks!
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Marek Muc
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Re: Treatment of unexercised share warrants

Post by Marek Muc »

Reclassifications within equity are generally allowed and IAS 32 does not specifically prescribe the labelling of equity items. Therefore it is not forbidden to reclassify to retained earnings, but it does seem counterintuitive. What is the reason that Company A wants to use retained earnings for this purpose?
derick1225
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Re: Treatment of unexercised share warrants

Post by derick1225 »

Hi Marek!

Thank you for your reply. Yes, agree with your point. Suppose Company A (a privately owned company) would like to declare dividends and that their Retained Earnings balance is not enough to cover their desired dividend declaration?

It does seem counterintuitive if it was flushed to Retained Earnngs for the purpose of declaring dividends.

Thanks for your feedback!
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Marek Muc
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Re: Treatment of unexercised share warrants

Post by Marek Muc »

I see, dividends are distribution of profits, so if you don’t have enough accumulated profits, then you should not label such a distribution as a ‘dividend’ irrespective of the reclassification of proceeds form warrants. You may be also challenged from the perspective of the faithful representation rule when it comes to this reclassification, as proceeds from warrants are not ‘earnings’. But it’s true that classification within equity is rather loosely dealt with in IFRS so I don’t see any paragraph to pinpoint here.
BTW, local laws may impose additional restrictions on the amount of dividends to be paid (e.g. by linking them to actual historical profits), so make sure to double check there as well.
derick1225
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Re: Treatment of unexercised share warrants

Post by derick1225 »

Noted on this Marek.

It would constitiute a departure from the faithful representation rule. With this, then it is a matter of professional judgment from the perspective of the external auditor.

Thanks for your help!
pub_acco
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Re: Treatment of unexercised share warrants

Post by pub_acco »

I can assure you that it's perfectly legal under IFRS to reclassify unexercised share warrants to Retained Earnings, because that is a very common practice in my country for some historical reasons. It would be desirable though that you explain the account policy in the footnotes in the significant accounting policies section and/or the equity section in accordance with IAS 1.79(b).
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Marek Muc
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Re: Treatment of unexercised share warrants

Post by Marek Muc »

Thanks for your feedback pub_acco, out of curiosity: does your commercial code (or sth similar) determine the amount of maximum dividends to paid to shareholders? And if so, is it linked to remained earnings as shown in financial statements, or is there other formula in place?
pub_acco
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Re: Treatment of unexercised share warrants

Post by pub_acco »

Corporate law does regulate dividends based on accounting retained earnings, but under the local gaap, unexercised warrants are reclassified to PL and naturally flow into the legal distributable retained earnings :o The reclassification adjustment doesn’t occur in the IFRS FS but many companies choose to reclassify within equity to keep gaap adjustments minimum.
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JRSB
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Re: Treatment of unexercised share warrants

Post by JRSB »

We do that by convention whenever I see it.
"I am always ready to learn although I do not always like being taught" - Churchill
pub_acco
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Re: Treatment of unexercised share warrants

Post by pub_acco »

Btw I’m sometimes curious whether we can achieve some consensus over the distinction between reserves created through capital transactions (eg APIC) and those created from profit (eg Retained Earnings). IFRS doesn’t touch this topic. Practices vary so much from country to country. Some transactions such as treasury share purchase and business combinations fall in between.

In a separate thread maybe.
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Marek Muc
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Re: Treatment of unexercised share warrants

Post by Marek Muc »

I agree that IFRS pay too little attention to the split within equity... And I would happily see retained earnings as a defined term!
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