Memo No. Issue Summary No. 1*
MEMO Issue Date August 20, 2020
Meeting Date EITF September 3, 2020
Contacts Bobbi Gwinn Project Lead (203) 956-5283
Jermaine Phua Postgraduate Technical Assistant (203) 956-5205
Alex Casas Assistant Director (203) 956-5327
David Yates EITF Coordinator (203) 956-5334
Paul Beswick EITF Liaison
Project
EITF Issue No. 19-C, “Warrant Modifications: Issuers’ Accounting for Modifications of Equity Classified Freestanding Call Options That Are Not within the Scope of Topic 718, Compensation—Stock Compensation, or Topic 815, Derivatives and Hedging”
Project
Stage Initial Deliberations
Issue
Issuers’ Accounting for Modifications of Equity Classified Freestanding Call Options That Are Not within the Scope of Topic 718, Compensation—Stock Compensation, or Topic 815, Derivatives and Hedging
Purpose
1. At the September 3, 2020 Emerging Issues Task Force (EITF) meeting, the staff will provide a summary of the staff’s research and outreach activities pertaining to warrant modifications and ask Task Force members to reach a consensus-for-exposure on this Issue. The staff would then proceed to drafting a proposed Update and discuss ratification with the Board at a future Board meeting. This is the first Task Force meeting on this Issue.
2. At its September 18, 2019 meeting, the Board added this Issue to the EITF’s agenda with the objective of providing authoritative guidance to clarify and reduce the existing diversity in the issuer’s accounting for modifications of equity-classified freestanding written call options (hereafter called “warrants” for ease of reference) that remain equity classified after modification. At that meeting, the Board clarified that the scope of this Issue includes all freestanding written call options that are similar to warrants in economic substance but may differ in legal form.
*The alternative views presented in this Issue Summary are for purposes of discussion by
3. The scope of this Issue does not include modifications of equity-classified call options that are within the scope of Topic 718, Compensation—Stock Compensation, or accounted for as derivatives under Topic 815, Derivatives and Hedging. That is, accounting for modifications of those call options will continue to be subject to the requirements in Topic 718 or Topic 815.
4. To assist the Task Force in determining which potential alternative would address this Issue, this Issue Summary presents a background of the accounting issue, a summary of the staff’s research and analysis of the issue and potential alternatives, and a summary of outreach conducted to vet the potential alternatives.
5. This Issue Summary is structured as follows: a. Issue Background
b. Potential Alternatives
c. Stakeholder Feedback on Potential Alternatives d. Staff Recommendation
e. Transition & Disclosure f. Next Steps
g. Appendix A: Additional Background on the Issue h. Appendix B: Current Codification Guidance i. Appendix C: Proposed Codification Amendments
Questions for the Task Force
1. Which alternative does the Task Force select to address this Issue?
2. If the answer to Question 1 is Alternative 1—Substance-based Approach, which alternate accounting view would the Task Force select for:
a. Scenario A: Financing Transaction—To Raise Equity
b. Scenario B: Financing Transaction—To Raise or Modify Debt c. Scenario C: Compensation for Goods or Services
d. Scenario D: Other Modifications?
Transition and Disclosure
5. Does the Task Force agree with the staff view that no additional recurring disclosures should be required?
Issue Background
6. This Issue relates to the issuer’s (rather than the holder’s) accounting for modifications of equity-classified warrants that remain equity equity-classified after modification. Due to a lack of any explicit guidance in the Codification, financial statement preparers and accounting firms analogize to other guidance in the Codification and certain SEC guidance to determine the appropriate accounting for warrant modifications from the issuer’s perspective. In making analogies to other guidance, preparers and firms have reached different interpretations and conclusions regarding whether a warrant modification should be accounted for as an equity adjustment or expense by the issuer, which has led to diversity in accounting for economically similar warrant modifications.
7. The following paragraphs provide an overview of the transactions in which warrants are commonly issued, the initial accounting for warrants, and the issues that arise in accounting for a warrant modification from an issuer’s perspective.
What is a Warrant?
8. A warrant is a written call option under which the counterparty has the right, but not the obligation, to purchase a specified quantity or amount of common stock from the issuing entity at a specified price. The Master Glossary to the Codification defines a warrant as “a security that gives the holder the right to purchase shares of common stock in accordance with the terms of the instrument, usually upon payment of a specified amount.”
9. Entities generally include warrants when issuing debt instruments to enhance their marketability and attract investors. Investors may view warrants as a means to leverage their position in a security because it provides them with the opportunity to increase their ownership and, therefore, increase their return if the value of the company increases. From the point of view of the issuer, the sale of a debt security with warrants results in a lower cash interest cost than would otherwise be possible or permits financing not otherwise practicable. Additionally, while the issuer usually cannot force a warrant holder to exercise the warrant and purchase the issuer’s stock, warrants may be viewed as a mechanism to facilitate raising equity capital in the future.
11. Warrants are also frequently used by Special Purpose Acquisition Companies (SPACs), which typically issue warrants with common stock in their initial public offerings (IPOs). A SPAC is a shell corporation without performance history or revenue that is formed for the sole purpose of raising capital through an IPO to then acquire a target business (or businesses). For example, one unit of a SPAC may be sold for $10.00. After the IPO is completed, the unit becomes separable into one share of common stock and one warrant to purchase a fraction of a share of common stock of the SPAC (or the entity that survives the acquisition) at a specified price. The warrant is generally exercisable after the SPAC has completed the acquisition of the target business(es).
12. While not pervasive, warrants are also issued without accompanying debt or equity instruments, such as, in a sales relationship or on a stand-alone basis. However, such issuances are generally made to parties that either are already invested in the company or have some other commercial relationship with the company. Examples include standalone issuance of warrants by a SPAC in lieu of dividends to the stockholders, issuance of warrants by an entity to a significant customer or supplier with a long-term sales agreement, or issuance of warrants by an entity to compensate agents for their services in raising funds or identifying potential investors.
Accounting for Warrant Issuance
13. A brief overview of the accounting considerations for warrants upon issuance is included for informational purposes only. The initial accounting for warrants is not within the scope of this Issue and does not affect the issue related to accounting for warrant modifications or the potential solutions to the accounting issue as discussed in this Issue Summary.
14. Warrants are contracts in an entity’s own equity and the initial accounting is determined based on its balance sheet classification as a liability or equity. Topic 480, Distinguishing Liabilities from Equity, establishes standards for issuer’s classification and measurement of certain financial instruments with characteristics of both liabilities and equity.
15. Topic 480 applies to freestanding financial instruments only and, therefore, when a warrant is issued contemporaneously or in contemplation of debt or equity financing, the first step is to evaluate whether the warrant is a freestanding financial instrument or an embedded feature within the debt or equity instrument. A warrant is generally considered freestanding (legally detachable and separately exercisable) if it is legally distinct, and the existence of a debt or an equity instrument with which the warrant is issued is not affected when the warrant is exercised. (Note that this Issue relates to warrants that meet the criteria of freestanding financial instruments per Topic 480.)
17. If a warrant is outside the scope of Topic 480, further evaluation under Topic 815 is performed to determine whether the warrant meets any one of the following conditions:
a. The warrant is a derivative and would be accounted as a derivative under Topic 815; that is, as a derivative asset or liability at fair value
b. The warrant is a derivative but qualifies for exception from derivative accounting because it meets both of the following conditions:
i. The warrant is indexed to the entity’s own stock
ii. The warrant is classified in stockholders’ equity in the entity’s balance sheet; that is, the warrant qualifies for equity classification per Subtopic 815-40, Contracts in Entity's Own Equity
c. The warrant is not a derivative and qualifies for equity classification per Subtopic 815-40 d. The warrant is not a derivative and equity classification is precluded per Subtopic 815-40; that
is, it must be liability classified.
18. If a warrant is determined to be liability classified, the issuing entity would record the warrant at fair value and mark it to fair value through earnings in each reporting period. (As noted earlier, modifications of liability-classified warrants are not within the scope of this Issue.)
19. If a warrant qualifies for equity classification, the warrant is recorded in the issuing entity’s equity (generally, additional paid-in capital or APIC) at relative fair value by allocating the proceeds received from the debt or equity issuance. It should be noted that, according to Subtopic 815-40, subsequent changes in the fair value of an equity-classified warrant are not recognized as long as the warrant continues to be classified as equity (see paragraph 815-40-35-2).
20. When the warrant is exercised, the entity records the issuance of shares and receipt of consideration, if any.
Warrant Modification and Related Accounting Issues
21. There are many reasons why an issuer may consider modifying outstanding warrants—the most prevalent being to raise cash and capital. As noted earlier, it is particularly common in the case of early-stage companies to modify warrants to raise additional funding from existing or new investors. For instance, instead of competing in the market to raise more funds by issuing new debt or equity, an entity may reduce the exercise price of outstanding warrants to induce exercise by current warrant holders and generate capital.
performing at the levels expected when the warrant was originally issued and, therefore, the investors need additional incentive to maintain their investment or to grant additional financing. Investor-driven amendments to existing warrant agreements are not uncommon for companies in pre-revenue or in early start-up stages. These companies often generate little or no revenue, have negative earnings, or have negative cash flows, and therefore frequently run out of cash and need outside funding to stay in business until revenue or positive cash flows are generated to finance operations. As such, the terms of warrant modifications are often influenced by an investor’s negotiation power and the issuer’s desire for a successful financing.
23. Additionally, entities may modify warrants in lieu of dividend distributions or as a gesture of goodwill to investors; that is, the warrant modification is not related to raising funds or acquiring goods or services. Sometimes entities modify warrants that do not have a contractual down round feature1 to reduce the exercise price upon a subsequent issuance of stock at a lower price—this is more common among private companies.
24. In addition, warrants are frequently modified by private companies that are in pre-IPO stages. Private companies may have complex equity structures that include multiple classes or types of common stock, preferred stock, or debt and related warrants. In preparation for an IPO, these companies may restructure their capital to make it simpler and understandable for the market. The restructuring of debt or equity is accompanied by modifications to the related warrants.
25. In the absence of specific authoritative guidance that addresses the accounting for warrant modifications, the current practice is to analogize to other authoritative guidance that stakeholders believe best reflects the economics of warrant modification. For instance, following is some of the accounting guidance that stakeholders generally analogize to when the modification is executed in conjunction with raising equity:
a. Guidance in Topic 718 for modification of equity classified stock options, which requires recognition of value transferred as compensation cost (that is, effect on earnings).
b. Guidance in Subtopic 470-20, Debt with Conversion and Other Options, regarding conversion of a convertible debt instrument to equity pursuant to an inducement offer, which requires immediate recognition of value transferred via the inducement offer as an expense (that is, effect on earnings).
c. The SEC Staff Announcement (paragraph 260-10-S99-2) on the effect on EPS for a period that includes redemption or induced conversion of equity classified preferred stock (codified in Topic 260, Earnings Per Share and formerly EITF Abstracts, Topic D-42,“The Effect on the Calculation
1 Down round feature is defined in the Master Glossary as a feature in a financial instrument that reduces the strike price of an issued
of Earnings Per Share for a Period That Includes the Redemption or Induced Conversion of Preferred Stock”) requires the incremental value transferred to be considered a deemed dividend in calculating net income available to common stockholders and EPS (that is, equity adjustment only and no effect on earnings).
d. Remarks made by T. Kirk Crews, SEC Professional Accounting Fellow, at the 2014 AICPA National Conference on Current SEC and PCAOB Developments (the 2014 SEC staff speech), indicating that when an equity-classified preferred stock is modified (but not extinguished), the effect could be recorded as a deemed dividend (equity adjustment only) or, in certain unique circumstances, as a charge to earnings.
Refer to Appendix A for a detailed discussion of different accounting views and Appendix B for excerpts of the authoritative guidance.
26. Overall, stakeholders consider individual facts and circumstances surrounding the warrant modification to determine which guidance to analogize to. Due to different interpretations regarding the substance of the warrant modification as well as the applicability of other guidance to warrant modifications, there is diversity in practice in accounting outcomes for economically similar transactions, which ranges from an immediate charge to earnings or an equity adjustment to no impact on earnings or equity.
27. Topic 718 requires that if a modification of an employee stock option increases the fair value of the option, any incremental fair value would be charged to earnings as compensation cost. While practice largely agrees that the guidance in Topic 718 should be applied to measure the effect of a warrant modification, there is diversity in recognition of that effect (that is, the debit accounting entry) as an expense or an equity adjustment by the issuer. Note that while Topic 718 is applicable to both employee and nonemployee share-based payment transactions (after FASB Accounting Standards Update No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting superseded Subtopic 505-50, Equity-Based Payments to Non-Employees), it is not applicable to transactions involving equity instruments granted
to a lender or investor that provides financing to the issuer. Because warrant holders generally provide financing to the issuing entity, warrant modifications that are executed to compensate the warrant holder for transfer of goods or services may not fall within the scope of Topic 718. Note that warrant modifications are generally executed to raise funds, and that modifications to compensate the warrant holder for transfer of goods or services are rare in practice. Nevertheless, analogy to Topic 718 is most common in practice because of the similarities between warrants and employee stock options.
in Subtopic 470-50, Modifications and Extinguishments on accounting for debt modifications and related costs incurred.
29. The staff observes that stakeholders largely agree that if a warrant modification is made to compensate the warrant holder for a transfer of goods or services or as a cost related to debt financing, it would not be appropriate to characterize the increase in value of equity classified warrants as a deemed dividend (or another equity adjustment). However, stakeholders have come to different conclusions regarding the accounting for warrant modifications that are executed to raise equity, or as a goodwill gesture (that is not related to financing or acquiring goods or services). While some stakeholders prefer expense treatment in the absence of specific guidance requiring an equity adjustment, others believe that unless the surrounding factors indicate that the modification is made as a compensation or relates to debt issuance or modification, the incremental value from a warrant modification is akin to a distribution to equity holders.
30. For more background on the Issue, refer to Appendix A which includes additional details of common warrant modification transactions and the different accounting views that exist in practice. Appendix B includes excerpts of the authoritative guidance to which analogy is drawn to reach the different accounting views.
Potential Alternatives
31. Considering the numerous fact patterns that may exist (see Appendix A for details) and the prevalence of warrant modifications executed with parties with which an entity has other commercial relationships, the staff observes that judgment is unavoidable to understand the substance of individual fact patterns. Existence of related party relationships (for example, warrant holders who are also common stockholders) would require an understanding of whether a transaction is a capital transaction or other commercial transaction and, if so, whether it is at arm's-length basis. Therefore, the staff thinks that any standard setting solution should be based on principles rather than uniform or bright-line rules to allow for the use of judgment in assessing the nature of the modification in order to reach a reasonably appropriate accounting conclusion. While different fact patterns may warrant different accounting outcomes, any solution should focus on addressing diversity in accounting for economically similar transactions rather than a single solution across all the different fact patterns. The staff thinks that diversity in accounting due to differences in fact patterns is reasonable and should continue to exist.
Scope Considerations
scope of this Issue because the existing guidance in Subtopic 815-40 for subsequent measurement of liability classified equity-linked instruments would address those modifications.
33. Additionally, the Board considered feedback from a large audit firm to include preferred stock modifications within the scope of this Issue. The Board decided to exclude preferred stock modifications from the scope of this Issue because of the differences between warrants and preferred stock; warrants are options to purchase stock of an entity whereas preferred stock with redemption or conversion features are more similar to debt (irrespective of equity classification), which generally requires (a) principle repayment (whether through redemption or conversion), and (b) the recognition of an interest/financing cost for the borrower and a return/yield on the investment for the creditor/investor. Similar to debt modifications, substantive modifications of preferred stock (accounted for as extinguishments or redemptions) results in (a) a new basis of accounting for the modified preferred stock, and (b) an extinguishment gain/loss (the difference between the new basis and the carrying amount of the modified preferred stock), which represents a return to the investor. Essentially, warrants and preferred stock are not alike in terms of the character of the instrument or the economic effect created and the related accounting considerations.
34. In developing the potential alternatives, the staff noted the following key notions:
a. FASB Concepts Statement No. 6, Elements of Financial Statements, defines expenses as “outflows or other using up of assets or incurrences of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations.”
b. Proposed FASB Concepts Statement No. 8, Conceptual Framework for Financial Reporting— Chapter 4: Elements of Financial Statements, defines expenses as “outflows or other using up of assets of an entity or incurrences of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities.”
c. Compensation is used in the Codification to describe reciprocal transfers of cash or other assets in exchange for goods received or services performed.
d. Dividend is defined in the Codification as dividends paid or payable in cash, other assets, or another class of stock and does not include stock dividends or stock splits.
e. Equity restructuring is defined in the Codification as a nonreciprocal transaction between an entity and its shareholders that causes the per-share fair value of the shares underlying an option or similar award to change, such as a stock dividend, stock split, spinoff, rights offering, or recapitalization through a large, nonrecurring cash dividend.
g. Investments by owners and distributions to owners are transactions between an enterprise and its owners as owners.
Alternative Considered and Dismissed
35. Following is an alternative that has been considered and dismissed by the staff because the staff analysis indicated that it is not a viable solution to the Issue.
Alternative Considered and Dismissed: No Accounting Impact
36. There could be cases in which a warrant modification does not affect the value of the warrant and no other element is identified for which accounting is required under GAAP (for example, an accounting adjustment may not be necessary when a warrant is modified as part of an equity restructuring). On the other hand, when additional value is granted to the counterparty by modifying warrants, the staff thinks that it represents a cost of doing business and that it should be reflected in the financial statements of the entity. Changes in assets, liabilities, and equity affect an entity’s ability to conduct and finance future activities, indicate the level of success in conducting or financing past activities, or both. The staff thinks that irrespective of whether the value represents a return to the investor (dividend) or an expense, there is an economic substance to the arrangement that the issuer needs to appropriately account for. The information about warrant modifications is useful, in conjunction with other financial statement information, to investors, creditors, and other users as an aid in assessing factors such as the entity’s financial flexibility, capacity to generate future cash flows, and risk. Therefore, the staff does not agree with the view that an entity is not required to account for warrant modifications and has not further explored this alternative.
Alternatives to Be Considered by the Task Force
37. The staff has developed the following alternatives for consideration by the Task Force. The Task Force will be asked to vote on these alternatives. Proposed codification amendments are included in Appendix C to facilitate a discussion and resolution of this Issue.
Alternative 1: Substance-based Approach
38. This alternative provides a principles-based framework based on the existing GAAP and SEC guidance to determine the appropriate accounting treatment based on the economic substance underlying the warrant modification. This framework leverages the principles in the following guidance:
a. Topic 718 for employee and non-employee stock options
c. Topic 260 for recognition of the value of down round feature in an equity-classified freestanding financial instrument when the down round feature is triggered (“the down round feature guidance”)2
d. SEC guidance on:
i. Modifications of equity classified preferred stock (partially codified in paragraph 260-10-S99-2)
ii. Equity issuance costs (codified in paragraph 340-10-S99-1).
39. Note that the proposed framework would not create new accounting principles or override existing principles but rather establishes a model to interpret and clarify which guidance is applicable based on the substance of warrant modification.
40. The staff thinks that in order to determine the nature of the transaction—and, the appropriate accounting treatment thereof—consideration should be given to the facts and circumstances surrounding the modification. In developing this alternative, the staff observed that any amendment to the accounting for warrant modifications requires the following considerations to determine the appropriate accounting treatment:
a. Does the amendment affect the value of the warrant? (Note: the staff believes that the warrant modification accounting issue arises only when the modification has an economic significance— that is, modification affects the value of the warrant. Given the obvious nature of this question, the staff has not specifically included this analysis as a part of standard setting solution but notes this question here for completeness.)
b. Has the amendment resulted in a modification or an extinguishment of the outstanding warrant? c. What is the appropriate accounting (recognition and measurement) for the change in the value
of the warrant? Considerations include the following:
i. What is the substance of the arrangement—is it to raise funds, or to compensate the counterparty for goods or services, or a combination of these or other purposes? ii. Are there related parties involved? What is their role?
iii. Are there other relationships affecting the transaction?
iv. Specifically, if the warrant’s value is reduced—why did the counterparty agree to it? Are there other transactions being contemplated or consummated in conjunction with the warrant modification?
42. The table below provides a high-level overview of the proposed accounting framework and should be read together with the following paragraphs that provide a detailed discussion of the proposed framework and the alternate views within the proposed framework. Note that this proposed framework would not override the application of other Topics that are specifically required under existing GAAP.
Consideration 1: Nature of the transaction
Financing
Transfer of goods/services
Other
a. To raise equity b. To raise or modify debt c. To compensate for goods or services
d. Modifications that are not executed with financing or as compensation
Consideration 2: Extinguishment or modification
Principles in Topic 718
Account for any amendment or exchange as a modification Consideration
3A:
Measurement
Principles in Topic 718
Excess, if any, of the warrant value after modification over the warrant value immediately before modification Consideration
3B:
Recognition
View 1: View 1:
Compensation Cost, per the guidance/principles in Topic 718
Regarding the manner (that is, capitalize versus expense) and pattern of recognition, consider
Topic 718 and other applicable guidance (such asTopic 330, Inventory, or Topic 606, Revenue
from Contracts with Customers)
View 1:
Equity issuance cost: reduce from proceeds of offering (APIC), expense if equity is not raised within 90 days from modification
Apply Topic 470 for new debt issuance or debt modification: - Debt issuance cost/discount for new debt
- Consider as Day 1 outflow in applying the debt modification guidance in Subtopic 470-50
Deemed dividend: adjust retained earnings, adjust the numerator when calculating EPS
View 2: View 2: View 2:
Deemed dividend: adjust retained earnings, adjust the numerator when calculating EPS
Deemed dividend: adjust retained earnings, adjust the numerator when calculating EPS
Expense immediately; modification represents compensation for agreeing to restructure or investor relations expense
View 3: View 3:
Expense immediately; modification represents compensation for agreeing to restructure
Accounting Consideration 1: What is the nature of the warrant modification transaction?
43. An entity first needs to understand the nature of the incremental value granted to the counterparty, which requires an analysis of all relevant facts and circumstances surrounding the modification, such as: reasons for the modification, relationship of the warrant holders to the entity, other relationships affecting the transaction, and other transactions consummated with or entered into in contemplation of the modification.
44. While the facts and circumstances surrounding a warrant agreement or modification may vary, the nature of the transaction could generally be categorized as follows:
a. Financing transaction—to raise equity
b. Financing transaction—to raise or modify debt
c. Transaction to compensate for goods or services received by the entity
d. Other modifications (warrant modifications that are not executed to raise financing or as compensation for goods or services).
Accounting Consideration 2: Should there be a distinction between modification and extinguishment?
45. The staff thinks that the modifications guidance for equity classified stock options in Topic 718 could be leveraged to develop guidance for modifications of equity classified warrants: a modification of the terms or conditions of warrants would be treated as an exchange of the original warrant for a new warrant—that is, an entity would not need to determine whether an amendment or exchange leads to an extinguishment or a modification.
46. In analyzing this question, the staff noted that the SEC guidance makes a distinction between extinguishment and modification of redeemable and convertible equity-classified preferred stocks, and requires entities to consider qualitative factors or quantitative tests based on cash flows or the fair value of the preferred stock to determine whether the amendment or exchange caused a substantial change and would be accounted for as an extinguishment.
because the conclusion would not affect the recognition or measurement aspect of accounting for warrant modifications. To illustrate this point, consider the following example of an equity-classified warrant that retains equity classification after modification:
• $100: warrant value at issuance (carrying value) • $120: warrant value immediately before modification • $150: warrant value after modification
a. Measurement
Although one could view the modification as substantive because the warrant value increased by more than 10 percent upon modification, it may not be appropriate for the issuer to measure a $50 loss by comparing (a) the warrant carrying value of $100, and (b) the warrant value after modification of $150. In other words, unlike for debt instruments or preferred stock, the issuer would not write off the original warrant to record the modified warrant at a new basis of $150 with an extinguishment loss of $50.
Rather, the value transferred by the issuer to the warrant holder through the modification is measured as $30 (that is, the difference between (a) the warrant value of $120 immediately before the modification, and (b) the warrant value of $150 after modification). The issuer would not recognize the $20 (that is, the increase in value from $100 at issuance to $120 immediately before the modification) that represents the change in warrant value gained by the holder over time due to the form of the instrument—consistent with the guidance in paragraph 815-40-35-2 that subsequent changes in the fair value of equity contracts are not recognized as long as the contracts continue to be equity classified.
As such, the staff notes that categorizing a warrant modification as an extinguishment or a modification would not affect the measurement of the modification. In this example, the warrant modification value is measured as $30 regardless of whether the modification is accounted for as an extinguishment or a modification.
b. Recognition
The accounting considerations and potential outcomes for the recognition of gain or loss upon extinguishment would align with those for modifications—see Accounting Consideration 3B for details.
outcome—in other words, it would be a distinction without a difference. While some stakeholders may view certain modifications of warrants as extinguishments (for example, when a warrant modification changes the underlying class of common stock), the staff thinks that the modification accounting model in Topic 718, which treats a modification of the terms or conditions of stock options as an exchange of the original instrument for a new instrument, would appropriately address the accounting for warrant modifications without introducing the complexities of a modification versus extinguishment analysis.
Accounting Consideration 3A: How should the modification be measured?
49. As discussed in Accounting Consideration 2 above, the value granted to the holder upon modification would be measured as the excess, if any, of the fair value of the warrant after modification over the fair value of the warrant immediately before modification. This approach would align with the guidance for modification of stock options in Topic 718.
Accounting Consideration 3B: How should the modification be recognized?
50. The following paragraphs include a discussion of alternative views regarding the recognition of the incremental value of the warrants based on the nature of the modification transaction. If the Task Force prefers Alternative 1 for this Issue (that is, a substance-based approach), the Task Force will be asked to vote on these alternate accounting views within the framework.
Scenario A: Financing Transaction—To Raise Equity
51. The following alternative views relate to scenarios in which warrants are modified to raise equity.
View 1: Equity Issuance Cost
52. The incremental value of the warrant resulting from a warrant modification directly attributable to a proposed or actual offering of securities should be considered an equity issuance cost that would be deferred and charged against the gross proceeds of the offering. Under this view, the incremental warrant value would be charged against the proceeds (APIC) from the equity offering; that is, there would be no effect on earnings or EPS. If the modified warrant is not exercised within 90 days from the modification effective date, the incremental warrant value would be recorded as a charge to earnings as a cost of an aborted equity offering. This alternative would be developed by linking to the SEC guidance on equity issuance costs codified in paragraph 340-10-S99-1.
with or in contemplation of the offering, and whether the warrant modification was executed with the objective of raising additional equity (such as by inducing the exercise by warrant holders or as a condition precedent to the offering being contemplated).
View 2: Deemed Dividend
54. As long as the facts and circumstances surrounding the modification do not reflect any economics other than the entity inducing warrant exercise to raise equity, the incremental value of the warrant should be viewed as being akin to a deemed dividend or distribution to owners. The incremental fair value would be (a) recorded to retained earnings as a deemed dividend from the entity to the warrant holders, and (b) subtracted from net income available to common stockholders in the calculation of EPS. This alternative could be developed by leveraging SEC guidance (2014 SEC staff speech) on modifications of equity-classified preferred stock.
View 3: Expense
55. The incremental value of warrant resulting from a warrant modification reflects a compensation to the counterparty for agreeing to restructure and, therefore, should be recorded immediately as a charge to earnings.
Scenario B: Financing Transaction—To Raise or Modify Debt
56. The following alternative views relate to scenarios in which warrants are modified to raise or modify debt:
View 1: Apply Topic 470
57. Entities would apply the requirements in Topic 470 and Topic 835 to determine the accounting for the incremental value of warrants if the modification is made to raise new debt or modify existing debt. That is, accounting for warrant modifications would be linked to the existing guidance in Topics 470 and 835 on accounting for debt issuance costs (that are directly related to issuing debt and that otherwise would not be incurred), amounts paid to the lender (or debt discount), and modifications or exchanges of debt instruments.
59. When a warrant modification is made in conjunction with modifying existing debt in a nontroubled situation, the existing guidance in Subtopic 470-50 is applied to determine the appropriate accounting. The incremental value of the warrants would be considered as a Day 1 outflow for purposes of applying the 10 percent cash flow test in paragraph 470-50-40-10 to determine whether the debt modification would be accounted for as an extinguishment or modification of the existing debt. The following table provides an overview of how the incremental value from warrant modifications would be recognized based on the debt modification guidance in Subtopic 470-50:
Warrant Modification + Debt Extinguishment Warrant Modification + Debt Modification Lender (that is, warrant holder is the lender of the existing debt being modified)
Incremental value of warrants upon modification shall be both:
- Associated with the extinguishment of the old debt instrument
- Included in determining the debt extinguishment gain or loss to be recognized.
Incremental value of warrants upon modification shall be both:
- Associated with the replacement or modified debt instrument
- Amortized as an adjustment of interest expense over the remaining term of the replacement or modified debt instrument using the interest method (along with any existing unamortized premium or discount).
The above is based on paragraph 470-50-40-17 that provides guidance on accounting for fees between debtor and creditor as part of an exchange or modification of debt.
Third parties (that is, warrant holder is
not the lender of the existing debt being
modified)
Incremental value of warrants upon modification shall be both:
- Associated with the new debt instrument - Amortized over the term of the new
debt instrument using the interest method in a manner similar to debt issue costs.
Incremental value of warrants upon modification shall be expensed as incurred.
The above is based on paragraph 470-50-40-18 that provides guidance on accounting for third-party costs of an exchange or modification of debt.
View 2: Deemed Dividend
60. The incremental warrant value is a distribution to owners and, therefore, should not be recognized as a charge to earnings. Instead, the incremental value should be considered a deemed dividend, and would be (a) recorded to retained earnings as a deemed dividend from the entity to the warrant holders, and (b) subtracted from net income available to common stockholders in the calculation of EPS.
View 3: Expense
Scenario C: Compensation for Goods or Services
62. A warrant modification executed to compensate the counterparty for goods and services received in a reciprocal transfer should be recognized as compensation cost per the guidance in Topic 718. If the counterparty in a warrant modification is a lender or an investor that provides financing to the issuing entity, the principles in Topic 718 would be applicable by analogy unless the warrant modification is clearly for a purpose other than compensation for transfer of goods or services to the issuing entity. Other areas of applicable GAAP, such as Topic 330, Inventory, or Topic 606,Revenue from Contracts with Customers, would be considered in determining the manner and pattern of recognition.
63. While the guidance in Topic 718 for non-employee stock options does not address the period(s) or the manner (that is, capitalize versus expense) of recognition for the entity issuing the equity, it provides that the issuer would continue to recognize cost in the same period(s) and in the same manner as if the issuer had paid cash for the goods or services instead of paying with or using share-based payment awards.
64. Specifically, paragraph 718-10-25-2B provides that transactions with nonemployees in which share-based payment awards are granted in exchange for the receipt of goods or services may involve a contemporaneous exchange of the share-based payment awards for goods or services or may involve an exchange that spans several financial reporting periods, and that judgment is required in determining the period over which to recognize cost.
65. Additionally, paragraph 718-10-35-1F provides that an issuing entity shall recognize related nonemployee compensation costs as the goods or services are disposed of or consumed by the entity. For example, when inventory is sold, the cost is recognized in the income statement as cost of goods sold, and as services are consumed, the cost usually is recognized in determining net income of that period, for example, as expenses incurred for services. In some circumstances, the cost of services (or goods) may be initially capitalized as part of the cost to acquire or construct another asset, such as inventory, and later recognized in the income statement when that asset is disposed of or consumed.
66. The staff notes that in deliberating Update 2018-07, which expanded the scope of Topic 718 to include non-employee arrangements, the Board noted that it expects practice to continue to analogize to the guidance for employee share-based awards in Topic 718 when appropriate:
the amendments, in many instances the pattern of recognition could be similar between employee and nonemployee share-based payment transactions because the awards granted to both employees and nonemployees often are similar.
67. While in the recent updates to Topic 718 (Update 2018-07 and FASB Accounting Standard Update No. 2019-08, Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with
Customers (Topic 606)), the Board continued with the scope exception that the guidance in Topic
718 is not applicable to share-based payments to nonemployees who provide financing to the entity, the staff notes that practice analogizes to the principles in Topic 718 to account for warrant modifications with investors/lenders that relate to acquiring goods or services in a reciprocal arrangement, and that it may be appropriate for practice to continue to do so.
Scenario D: Other Modifications
68. The following alternative views relate to warrant modifications that do not fall within the above-discussed categories, that is, the warrant modifications that are not executed to raise financing or to compensate for goods or services as their objective. Certain common transactions that would fall within this category include warrant modifications executed as a goodwill gesture to investors or warrant modifications that are executed to add down round adjustments (which is more common among private companies).
View 1: Deemed Dividend
69. Incremental value of warrants from modifications that are not executed to raise financing or to compensate the counterparty for goods and services received in a reciprocal transfer would be (a) recorded to retained earnings as a deemed dividend from the entity to the warrant holders, and (b) subtracted from net income available to common stockholders in the calculation of EPS. The underlying premise of this view is that if the modification of an equity classified instrument that remains equity classified after the modification results in an incremental value to the holder but does not represent a cost of financing or a compensation for goods or services for the issuing entity, then the incremental value represents a distribution to the warrant holders (or equity investors).
70. Proponents of this view note that this alternative could be developed based on the principles in the down round feature guidance (paragraphs 260-10-25-1 and 260-10-45-12B), which provides that, for freestanding equity classified financial instruments, entities would recognize the effect of the down round feature when it is triggered as a dividend and as a reduction of income available to common shareholders in basic EPS.
View 2: Expense Immediately
expense. Proponents of this view believe that if a transaction is not specifically accounted for as an equity adjustment under GAAP, then it must be recorded as an expense.
Alternative 2: Instrument-based Approach
72. This alternative provides a rule that, irrespective of the economic substance of the modification as discussed in Alternative 1, the incremental value of a warrant should always be accounted for as a dividend distribution from the entity to a warrant holder (or holders). That is, the incremental value of a warrant would always be recorded to retained earnings as a deemed dividend and subtracted from net income available to common stockholders in the calculation of EPS. This alternative does not require an evaluation of the nature or substance of the transaction, rather it focuses solely on the nature (or equity classification) of the instrument.
73. The theory underlying this alternative is that because the warrants (within the scope of this Issue) are equity-classified instruments that remain equity classified after a modification, the return on that instrument should be considered akin to a distribution to owners irrespective of the reason for the transaction. Proponents of this view believe that Alternative 2 could be developed based on the principles in the down round feature guidance.
Alternative 3: Expense-all Approach
74. Some stakeholders (three mid-sized accounting firms) suggested that expense should be a “default” recognition approach for the incremental value of the warrants from modification, regardless of the economic substance of the modification. Variations of this alternative include: expense treatment for all warrant modifications according to the principles in Topic 718; expense treatment for all warrant modifications unless the modification is made to raise equity only; expense treatment for all warrant modifications unless an equity adjustment or another treatment, such as debt issuance cost under Topic 470, is specifically required under existing GAAP. Proponents of this alternative believe that warrant modification represents an investor relations expense and, therefore, should be recognized through earnings.
Stakeholder Feedback on Potential Alternatives
76. Additionally, the staff discussed the Issue with the Private Company Council (PCC) and the Small Business Advisory Committee (SBAC) at their meetings on December 16, 2019 and December 17, 2019, respectively, and obtained their feedback on potential solutions. PCC members include individuals with backgrounds and experience in using, preparing and auditing private company financial statements, and SBAC members include small public companies, mid-market accounting firms and users of financial statements. The feedback from PCC members and SBAC members who provided input is included in this section.
77. Multiple mid-market firms noted that issuance or modifications of warrants is common among companies in early stages, especially in pharmaceutical and technology space, or pre-IPO companies, and that these companies often have negative revenue and/or negative cash flows, and depend on outside funding to sustain operations. The staff observed that among the participants, the mid-market and boutique accounting firms had the most experience with warrant modifications because they serve larger numbers of such companies.
78. To facilitate the discussions, the staff shared a draft outline of a principles-based framework (similar to Alternative 1—Substance-based Approach in Potential Alternatives) in advance of the meetings. Overall, all the participants agreed that judgment is required to understand the individual fact pattern in determining the appropriate accounting, and a majority of the participants generally supported a principles-based framework rather than a single recognition model for all fact patterns. However, the participants provided mixed feedback on their preferred alternative view (expense or equity adjustment) for the different categories of warrant modification transactions and the staff suspects that the preference could have been biased towards conclusions previously made by those firms in the absence of specific guidance.
Substance-based Approach
Overall
80. All participants agreed with the proposed categorization of the nature of the warrant modification transactions as financing (to issue debt or equity) or transfer of goods or services in a reciprocal arrangement. All participants noted the importance of judgment in assessing the nature of each transaction individually to determine the correct categorization in the framework.
81. Several of the respondents offered fact patterns in which a warrant modification would not be captured as either a financing transaction or a transfer of goods or services, and recommended that a “catch-all” category be included in the proposed framework to capture such warrant modifications. Some common examples that multiple participants provided are:
a. Warrant modifications that are not related to raising funds or acquiring goods and service but are executed in a non-reciprocal transfer of value to significant investors (that is, as a goodwill gesture, which some referred to as a distribution to owners and others as an investor relations expense)
b. Warrant modifications in connection with a non-contractual down round adjustment which occur more commonly among private companies
c. Warrant modifications as capital contribution such that the warrant holder gives up value to assist the company in raising additional funds.
82. The participants noted that the framework addresses modifications that result in incremental warrant value only, and a few mid-market firms recommended that guidance be provided for warrant modifications that result in a lower value of the warrants. However, multiple respondents agreed with the staff’s approach of focusing on an increase in value of warrants only. One respondent commented that, historically, when someone calculates a lower warrant value post modification, it is generally because they are not performing the calculation correctly; this respondent has seen incorrect calculations in which the post-modification value of the warrant is compared to its value at issuance rather than the value immediately before the modification.
Extinguishment versus Modification Analysis
84. All participants, except one Big 4 firm (that suggested that the scope of this Issue also should include preferred stock modifications), agreed that a modification versus extinguishment analysis is not necessary for warrant modifications. All those participants supported their view by noting the similarities between warrants and stock options granted to employees or nonemployees that are within the scope of Topic 718, and that Topic 718 treats a modification of an equity classified stock option as an exchange of the original award for a new award. One participant added that the intent of most issuers when executing a warrant modification is to make it more valuable to the holder rather than to extinguish an existing warrant.
85. One Big 4 firm that suggested that the scope of Issue should include preferred stock modifications noted that extinguishment versus modification analysis should be required for warrant modifications, and that changing the class of underlying stock in a warrant, for example, could be considered an extinguishment. Multiple participants noted that preferred stock have debt-like features, and that, therefore, the SEC guidance on modifications of preferred stock requires a modification versus extinguishment analysis and is parallel to the debt modification guidance in Topic 470. They also noted that requiring such an analysis for warrants would create unnecessary complexity in accounting for warrant modifications.
Measurement
86. Regarding the measurement of the warrant modification, all participants agreed that the incremental value granted to the warrant holder should be measured as the difference between (a) the fair value of the warrant immediately before the modification, and (b) the fair value of the warrant after modification. Multiple participants noted that practice currently applies this measurement approach.
Recognition
incremental value of warrants would reduce the proceeds “when the warrant is exercised,” which is the published view of another Big 4 firm.
88. One mid-market firm highlighted that equity issuance costs are required to be expensed if the related offering is not made within 90 days, and raised a concern about the 90-day bright-line being somewhat arbitrary, that it does not consider factors such as market conditions, and recommended that it not be used to ascertain whether a warrant modification is directly related to an equity raise. This firm noted a preference for “default” expense treatment rather than an equity adjustment because they believe that warrant modifications are a form of investor relations expense.
89. One Big 4 participant who does not support the view that a warrant modification to raise equity should be recognized as an equity issuance cost noted that the guidance on equity issuance costs is narrowly applied and should not be extended to warrant modification transactions. They recommended deemed dividend as the appropriate recognition approach (which is the firm’s published view). Another respondent also noted that the equity issuance cost guidance is narrowly applied, and that it is generally applicable to expenses that are incurred in cash.
90. One mid-market firm that supports equity adjustment for a warrant modification in conjunction with an equity raise commented that consideration should be given to whether an entire class of warrants is modified. If so, the incremental value should be viewed as akin to a deemed dividend, but if the modification is not offered to all warrant holders, the incremental value should be recognized as an equity issuance cost. Another participant noted that deemed dividend treatment is meant to capture scenarios in which there is not an inducement to encourage immediate exercise, whereas equity issuance cost treatment should be provided when there is an inducement to encourage immediate exercise.
91. Overall, while there was no general consensus, all the Big 4 firms and a majority of mid-market firms and other participants (including two users of financial statements on SBAC) expressed a preference for equity adjustment for warrants modifications executed to raise equity, and two mid-market firms expressed a preference for expense treatment.
92. Regarding warrants modified in conjunction with issuing new debt, multiple participants highlighted that practice already analogizes to guidance in Topic 470, which would require the incremental value of warrants to be accounted for as debt issuance costs amortized through earnings over the life of the borrowing.
modification guidance in Subtopic 470-50, and that the incremental value of warrants should be considered a Day 1 outflow in applying the debt modification guidance. One mid-market firm that prefers a “default” expense treatment for all warrant modifications, supports this view and recommended that clarification be provided regarding how to evaluate whether incremental costs are directly attributable to an offering (debt or equity), potentially by providing examples.
94. Discussion of warrant modifications executed to compensate the counterparty for goods or services revealed confusion surrounding the scope of Topic 718. Specifically, some participants including a Big 4 firm noted that Topic 718 is applicable to investors and lenders who provide goods or services to an entity, as opposed to acting in their capacity as financiers. Other participants, however, noted that Topic 718 is not applicable to share-based arrangements with investors or lenders but added that practice still analogizes to the guidance in Topic 718. The majority of the accounting firms (including Big 4 and mid-market firms) mentioned that issuance or modification of warrants in exchange for goods or services is rarely seen in practice, whereas one mid-market firm noted its experience with warrant modification in case of supply agreements. Multiple firms noted that if an entity purchases goods via warrant modification, inventory guidance in Topic 330 would be applicable.
95. One Big 4 firm that thinks that applicability of Topic 718 is clear, suggested that a proposed solution should not include warrant modifications executed to compensate the counterparty for goods or services in a reciprocal transaction. Multiple mid-sized firms agreed with that view and one mid-sized firm added that if the final guidance does not cover warrant modification for goods or services, the staff should clarify the reason for the omission (that the guidance in Topic 718 is applicable) in the basis of conclusions. One boutique firm highlighted that a clarification is especially important for small private entities because these entities can face serious consequences, such as a violation of debt covenants, if an auditor imposes last minute expense treatment for a warrant modification.
96. In considering “hybrid” transactions that involve transfers of goods or services along with financing, or debt financing along with equity financing, most firms noted that such transactions are infrequent in practice, and that in those scenarios often new warrants are issued rather than modifying the existing warrants. The SEC staff noted that in those cases, they would expect the amount attributable to debt or expense to be recognized per the appropriate guidance and the remaining (residual) amount as an equity adjustment.
98. All participants agreed that all alternatives views within the framework were operable, and the mid-market and boutique firms added that small and mid-mid-market companies and their auditors would greatly benefit from a solution to this Issue. None of the participants highlighted any potential for unintended consequences under the proposed principles-based framework.
99. Two users of financials statements on SBAC discussed their experience with warrant modifications and noted that it is commonly executed to raise funds, and that deemed dividend is most common accounting treatment among entities. They did not raise any concern with that accounting treatment. One of those users noted their preference for equity adjustment (rather than expense treatment) because, they believe, analogy to Topic 718 is not appropriate for warrant modification transactions that are executed to raise funds rather than to compensate for transfer of goods or services.
Other Potential Alternatives
100. One mid-market accounting firm noted that a substance-based approach (or a principles-based framework) focuses on the nature (substance) of the transaction, and suggested another solution that focuses on the nature of the instrument (equity classification) and provides that all warrant modifications within the scope of the Issue be recognized as deemed dividends.
101. Another mid-market firm noted that equity adjustment is a privilege and proposed another alternative that the incremental value from warrant modification always should be expensed (following the guidance in Topic 718), regardless of the nature of the transaction. That firm proposed two other alternatives that allow equity adjustments in certain limited cases and require expense recognition in all other scenarios:
a. If the modification is solely to raise equity, it would be recognized as an equity adjustment. In all other cases, the incremental value of the warrant represents investor relations expenses and would be expensed.
b. Existing guidance, if specific, is applied based on the nature of the modification. If the Codification does not directly require an equity adjustment or another accounting treatment (such as, under Topic 470), the incremental value of the warrant represents investor relations expenses and would be expensed.
incremental value transferred in a warrant modification cannot always be characterized as a nonreciprocal transfer of value to shareholders and, therefore, should not always be viewed as a dividend.
103. Two Big 4 firms (including one that suggested that the scope of Issue also should include preferred stock modifications) recommended that rather than establishing an accounting framework to determine whether a modification would be recorded as an expense or an equity adjustment, the staff should consider a broader alternative in which only examples are provided. One of these firms noted that a framework could be subject to manipulation as new warrant modification transactions emerge and fall outside of the literature.
104. One PCC member suggested that for accounting purposes a modification may not need to be recorded and including only a disclosure would be sufficient.
Suggestions for Scope Expansion
105. Some firms recommended that the Board should consider including modifications of liability-classified warrants in a proposed solution. One mid-market firm discussed a certain fact pattern in which a modification of a liability-classified warrant was recorded as an equity adjustment. In that fact pattern, a private company was raising more funds and the new investors required a reduction in the value of outstanding warrants held by the existing investors as a condition to providing new funding. The reduction in value resulting from the modification of liability-classified warrant was considered a capital contribution made by the warrant holders in lieu of providing the needed funds for which the new investor stepped in.
106. Another firm noted that the modification of written put options be considered as well but added that that issue is different from this issue because the issuer would buy, not issue, shares, like in the case of warrants (written call options).
Staff Recommendation
108. The staff recommends Alternative 1—Substance-based Approach, which provides a principles-based framework to determine the issuer’s accounting for warrant modifications based on the economic substance of a transaction.
109. With respect to the various alternate accounting views within Alternative 1 related to recognition, the staff recommends the following based on the nature of the warrant modification transaction:
i. Financing transaction to raise equity—equity issuance cost per the guidance in paragraph
340-1-S99-1
ii. Financing transaction to raise or modify debt—debt guidance in Topic 470; warrant modification
in conjunction with debt modification is Day 1 outflow in applying the debt modification guidance in Subtopic 470-50
iii. Transaction to transfer goods or services in a reciprocal arrangement—compensation cost;
manner (that is, capitalize versus expense) and pattern of recognition would be determined based on the guidance/principles in Topic 718 and other applicable GAAP. To only be included in the basis for conclusions only of a proposed amendment for this Issue.
iv. Other warrant modifications that are not executed to raise financing or as compensation for goods or services—deemed dividend (consistent with the existing principles in down round feature
110. This table provides a high-level overview of the staff recommendation and should be read together with the detailed discussion included in the following paragraphs.
Consideration 1: Nature of the transaction
Financing transaction
Transfer of goods/services
Other
a. To raise equity b. To raise or modify debt c. To compensate for goods or services
d. Modifications that are not executed with financing or as compensation
Consideration 2A: Measurement
Principles in Topic 718
Excess, if any, of the warrant value after modification over the warrant value immediately before modification Consideration 2B:
Recognition
View 1: View 1: [Discussion in Basis for
Conclusions Only]
Compensation Cost, per the guidance/principles in Topic 718
Regarding the manner (that is, capitalize versus expense) and pattern of recognition, consider
Topic 718 and other applicable guidance (such as Topic 606,
Topic 330)
View 1:
Equity issuance cost: reduce from proceeds of offering (APIC), expense if equity is not raised within 90 days from modification
Apply Topic 470 for new debt issuance or debt modification: - Debt issuance cost/discount for new debt
- Consider as Day 1 outflow in applying the debt modification guidance in Subtopic 470-50
111. As discussed earlier, the staff believes that a single recognition approach would not always appropriately reflect the substance of the arrangement because of the numerous varied transactions that may exist, and that, therefore, any solution should allow for the use of judgment to determine the substance of the modification and the appropriate accounting thereof. The recommended solution specifies the application of the existing guidance in the Codification per the substance of the warrant modification transaction and, for the transactions not specifically within the existing guidance, interprets the accounting principles that exist in the Codification and SEC guidance to determine appropriate characterization as expense or distribution to owners. The staff notes that the recommended solution would not override the application of any existing guidance or introduce new rules or accounting principles and, therefore, is not expected to pose any new implementation issues. 112. The staff thinks that the recommended solution would meet the objective of providing authoritative guidance on this Issue and would reduce diversity in accounting for warrant modifications by establishing a framework that leads to a more consistent accounting for similar transactions while also allowing for the application of judgment to determine and account for the substance of the arrangement. The staff thinks that practice would benefit from reduced costs and complexity related to the accounting analyses, audit procedures, as well as regulatory reviews (SEC comments, pre-clearance letters) on this issue. The staff highlights that the recommended solution would require equity adjustment for warrant modifications that are not related to debt financing or transfer for goods and services which would be consistent with the feedback received from users of financial statements. Additionally, based on the feedback received, the staff believes that users of financial statements would benefit from consistent accounting and reporting for economically similar warrant modifications.
113. In analyzing the alternatives, the staff considered that the conceptual framework defines expense as outflows or other using up of assets or incurrences of liabilities resulting from an entity’s ongoing major or central operations and activities. Additionally, the staff considered the following discussion on expenses and capital transactions from the Proposed Statement of Financial Accounting
Concepts, Concepts Statement 8—Conceptual Framework for Financial Reporting, Chapter 7: Presentation:
a. Revenues, expenses, gains, and losses (components of comprehensive income) reflect the extent to which, and the ways in which, the equity of an entity increases or decreases other than from transactions with owners.
