Shares issued along with warrants

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AQS
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Shares issued along with warrants

Post by AQS »

Hello Members,

Need your help to clarify an equity related trx. We raised money from capital market and along with shares issued stock warrants to investors.

For e.g.
Issued 1M shares @ $10/share = $10M (received cash net of commission $9.8M). Issued 100,000 warrants (with net settlement feature, which will make the warrant a derivative liability) with an exercise price of $12 (exercisable within 3Yrs from issue date).

Approach 1:
1. Calculate FV of warrants on issue date using Black Scholes
2. Deduct FV of warrants from total proceed of $9.8M
3. Record warrant FV as derivative liability (revalue every period end with P&L charge).
4. Record net balance ($9.8M less warrant FV) to equity.

Approach 2:
Proportional method - But the problem is we don't know fair market value of warrants (can we consider BS value as fair market value, not quite sure).

Let me know for any relevant guidance.

Thanks
JRSB
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Re: Shares issued along with warrants

Post by JRSB »

I'm not sure you're getting anything in return, so potentially zero?
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Marek Muc
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Re: Shares issued along with warrants

Post by Marek Muc »

as those warrants somehow "attached" to new shares? so that the proceeds are for the shares AND warrants?
AQS
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Re: Shares issued along with warrants

Post by AQS »

Yes, we can say that the proceeds is for stocks & warrants. Once those warrants will be exercised & converted into shares the holders will pay a price for the shares ( warrant exercise price).
Another way of looking into this, as the price of shares goes up the value of warrants goes up.
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Marek Muc
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Re: Shares issued along with warrants

Post by Marek Muc »

your Approach 1 looks good to me, this would be similar to recognition of compound financial instruments:
https://ifrscommunity.com/knowledge-bas ... nstruments

I would allocate transaction costs as well, and the part attributable to warrants goes to P&L
AQS
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Re: Shares issued along with warrants

Post by AQS »

Thanks!
DJP
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Re: Shares issued along with warrants

Post by DJP »

A question related to this question from the investor's point of view:

If all existing investors receive warrants on their existing stock holding, would the warrant be recognised as a derivative financial asset (DR) against P&L (CR), or should the CR be booked instead as decrease in the stock holding? (Presumably the share price should drop when the warrants are issued.)

Thanks!
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Marek Muc
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Re: Shares issued along with warrants

Post by Marek Muc »

I guess you need to treat those separately and determine whether issuance of warrants decreases the FV of previously held shares. If so, you would have:
DR: FV of shares
CR: P&L

but I doubt that these impacts will cancel out, markets are not that efficient/rational :)
DJP
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Re: Shares issued along with warrants

Post by DJP »

Yup, I believe your DR and CR are the other way round, but I agree with that view too. Thanks!
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Marek Muc
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Re: Shares issued along with warrants

Post by Marek Muc »

yes, the impact will be the same... in a perfect world :)

PS. unless the shares were FVOCI
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