Abstract
Many start-up companies have made extensive use of warrants to purchase shares or stock options. The value of a warrant is derived from the price of its underlying shares, as well as from several other variables. Thus, conceptually, a warrant is a derivative contract. However, a particular warrant may or may not meet the definition of a derivative in Statement 133. Even if a warrant were to meet that definition, it might be exempt from the provisions of FAS 133, in which case the issuer of the warrant would be allowed to account for the warrant as an equity instrument rather than as a derivative liability. This article discusses 1) the steps that should be taken in assessing whether or not a warrant meets the FAS 133 definition of a derivative, 2) accounting considerations for the issuer of the warrant, 3) accounting considerations for the holder of the warrant, and 4) issues to consider when determining the fair value of warrants.
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