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Accounting for Share Warrants

R2 00063

Share warrants are instruments that give the holder a right, but not an obligation, to purchase the entity’s share at specified price (generally at discounted prices) and date. Warrants are often issued to investors investing in start-ups, the lender in debt-arrangement or the private equity investor to provide them with specific right.

Based on the terms, the share warrants are classified as equity or debt instruments in line with the requirements of Indian Accounting Standard (Ind AS 32), Financial Instruments: Presentation. The classification of the warrants into equity or liability is generally not straight forward and requires significant judgement e.g. when warrants are attached to existing debt or equity shares. 

Is warrant an equity or a liability
Classification of a warrant either as liability or equity determines accounting of these instruments. This would in turn significantly affect an entity’s balance sheet, particularly when these instruments are liability classified.

There are various considerations which need to be evaluated when determining the classification of warrants, including the substance of the contractual arrangement.

Generally, a warrant would not create any obligation to deliver cash, instead, it would be settled by the issuer company by issuing additional shares of the Company. In such case warrants would be classified as “equity” and not a “financial liability” 

Classification of financial instruments into financial liability and equity
Contractual obligation to deliver cash/other financial asset to another party, or to exchange financial assets or financial liabilities with another party under potentially unfavourable conditions (for the issuer of the instrument):- 

IF YES- Then it would be a financial liability.
However, if the warrant will or may be settled in the issuer’s own equity instruments:

  1. Is it a non-derivative that compromises an obligation for the issuer to deliver a fixed number of its own equity instruments or
  2. Is it a derivative will be settled only by the issuer exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.

IF YES- Then it would be classified as an equity. 

Other aspects
Entities may consider that some of the features of the instrument are protective in nature and investor may not exercise some of the rights particularly related to redemption in cash. They may obtain a letter of undertaking from the holder of warrants indicating that the issued warrants would not be redeemed in cash. Such an undertaking, unless it is legally enforceable and irrevocable, is not sufficient to classify the instrument as equity rather that as financial liability. 

GAAP difference
Under IGAAP, warrants would be accounted for only when the warrants are finally exercised and converted into shares. However under IndAS/IFRS, these instruments could impact the balance sheet of the investee companies as some of these instruments would get classified as a liability.

In particular, accounting for warrants issued as part of private equity financing transaction/arrangement would depend on the contractual terms. Entities involved in such transactions would need to reassess their instruments and understand the various terms and conditions, rights and obligations and assess if there is a change in the classification of such warrants from equity under IGAAP to a financial liability under IndAS or IFRS.

At AJSH, we assist our clients in setting up your business in India, bookkeeping, payroll accounting, taxation, secretarial compliances, audit, trademark registration, business structuring, advisory services and MCA filings. If you have any questions or want to know more about accounting of share warrants, kindly contact us.



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