Share warrants issued to shareholders

[ana.lyp]

Hi All,

Need some guidance as I'm unable to find the right information online.

Our company has issued share warrants to current shareholders, however, so far no cash has been received from the shareholders. Please see below an example of the terms of the share warrant. How would this be accounted for, under which standard? Thanks a lot for your help.

This Warrant Certificate is issued to
XYZ shareholder
and includes, in accordance with the issuing resolution,
800
Warrants à € 1.86, totalling,
€ 1,488,
entitling for each Warrant to subscribe
one (1) new share in
XYZ Company

for an exercise price of Euro 150 per share.
The applicable terms and conditions for this Warrant are set out in the Terms and Conditions for Warrants 2020/2023 for Subscription of New Shares in XYZ Company wherein, among others, applicable terms of recalculation of exercise price and number of new shares are set out.

[AQS]

Hi,

First of all small caveat, answer for financial instruments questions is not very straight forward & devils is in the detail.

But I can provide you some reference points for your reading which will help.

Search:
VIEWPOINTS: Applying IFRS in the mining Industry. Handout issued by CPA Canada.

Relevant IFRS could be IFRS 2 & IAS 32/39/IFRS 9.
On the face of it it looks like financial instrument falls in the ambit of IAS39.

The key questions are, is this liability or equity instrument. If it is liability then you need to FV using any valuation model ( we use BlackSchole normally) & then FV each reporting period with the changes goes to PL.
if it is equity instrument then you FV this once & book the JE to equity.

Hope this helps.

Thanks

[ana.lyp]

Hey AQS,

Thanks for your feedback. I did actually read the handout issued by CPA Canada and have arrived at the same conclusion as you when it comes to the relevant standards. Nice to know that I am probably on the right track.

Thanks for your help.

[JRSB]

Why did you issue them warrants? Just for future fundraising options?

[ana.lyp]

Hey JRSB,

Yeah exaclty.

[ana.lyp]

Why did you issue them warrants? Just for future fundraising options?

Actually, thinking about it, I think they issued this more as an incentive to the share holders. Currently the company is unlisted, and the exercise price of one share in the warrant is set at €150. The only way the warrant will be exercised is if the company gets listed and the warrant holders are able to trade these shares at a higher price on the stock market. Otherwise, exercising the share warrants would make no economical sense to the warrant holders.

[JRSB]

An incentive to keep holding the shares? Not sure what the company gets out of it, since if the value goes to 150 or above they could issue new shares at that price at the time. why does it matter if current shareholders sell their shares in the absence of getting warrants.. if cash is needed in future, offer to sell new ones to shareholders (which in some countries you have to anyway, unless rights are waived)