Balance Sheet Classification of Shares and Warrants

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Oct14

Balance Sheet Classification of Shares and Warrants

Linda Chan

October 14, 2006

Know More: SEC 2.0, SEC

Under the requirements of Financial Accounting Standards Board’s Emerging Issues Task Force Abstract No. 00-19, Accounting For Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (EITF 00-19), some companies have discovered they improperly booked as stockholders’ equity the warrants issued, when they were suppose to be considered a liability.

The Securities and Exchange Commission (SEC) set forth its views in December 1, 2005 on the circumstances warrants should be treated as liabilities. EITF 00-19 requires several types of convertible equity instruments such as warrants to be reclassified as liabilities where the issuer’s ability to settle the instrument in equity is not entirely within the issuer’s control such as when the issuer’s registration rights agreements contain liquidated damages penalties if the shares underlying the instrument are not timely registered.

Consequences of improper booking include a decrease in net worth, a hit on earnings, and the expense of restating financials.

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