Stock warrants to Broker

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AQS
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Joined: 07 Feb 2019, 18:05

Stock warrants to Broker

Post by AQS »

Hello Members,

Need your help on accounting of stock warrants issued to broker in lieu of services provided for issue of common shares.
Ideally if nothing else involved this would qualify under IFRS 2, but there is a scope exemption under IFRS2.6, which states that if goods & services within the scope of IAS 32(8-10) then IFRS2 will not apply.
Now under IAS 32 if contract to be settled net in cash it should be accounted for under IAS 32.
In this transaction we do have net settlement option only until registration of shares happened once registration is done the cashless exercise option is no more valid. The exercise price of shares is 125% of the issue date share price ( the warrants are out of money from the date of issue until the registration date, so not practical to exercise)
We issued warrants in feb & registration happened in April. How should we record these warrants at initial recognition ( under IFRS 2 or IAS 32)
Thanks
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exIFRS
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Re: Stock warrants to Broker

Post by exIFRS »

I try to steer clear of Financial Instruments when I can, so take this for what it is worth, hopefully one of the more experience contributors will jump in. But my thoughts. So yes normally warrants or shares issued to a broker are captured by IFRS 2 as a payment for service. I have seen this frequently and can even point to some references to this accounting. However the net settled element complicates things. And I am trying to wrap my head around the economics of it, do you not mean it can be cash settled? Because I would think when we talk about net settling the parties each have an asset and a liability to the other which we are netting off. What liability does the broker have to the company?
AQS
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Joined: 07 Feb 2019, 18:05

Re: Stock warrants to Broker

Post by AQS »

Thanks for putting you time on this. You can say cash less exercise. So warrant holder won’t pay any cash at the time of exercise instead they will receive less shares.

Broker liability is to pay exercise price in cash, so instead of paying the exercise price broker will tell us to effectively sell the shares at current market price & issue net shares.

For e.g. 100 shares @ $10 exercise price. Market price is say $12, so $12-$10=$2 is net gain for broker per share, so now instead of taking 100 shares & paying the broker will take 16.6666 shares & pay no cash. This way broker total gain will still be same.

Hope this helps.
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exIFRS
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Re: Stock warrants to Broker

Post by exIFRS »

Thanks that helps my understanding a lot. Basically the broker only gets paid if the share price rises, and effectively we have a formula to determine the payment to the broker. Again, all the same warnings as earlier, and hopefully someone more knowledgeable will jump in soon, but this feels much more like a Share Appreciation Right than net settling. To me net settling implies the possibility of having to pay cash as well as receive it, depending on the price movements. Here the broker just ends up with nothing if the price doesn't rise right? But this might all just be my bias away from IFRS 9 and towards IFRS 2, I want this to be a share based payment :D
AQS
Posts: 33
Joined: 07 Feb 2019, 18:05

Re: Stock warrants to Broker

Post by AQS »

Thanks dear! Really appreciate you help. B/w I also wanted this to be IFRS 2 :).

& just to add more flavour to this trx. this scope exemptions kicks in only when the services are acquired in a transaction which has been recorded as financial instrument & our trx is compound instrument so not sure which way to go.
JRSB
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Re: Stock warrants to Broker

Post by JRSB »

Seems to me a share based payment with the FV going as a deduction from share premium
JRSB
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Re: Stock warrants to Broker

Post by JRSB »

Still time to get comments in on a similar theme ...

https://www.ifrs.org/projects/work-plan ... t-letters/
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