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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