Accounting for stock warrants

How to Account for Stock Warrants

A business may pay a provider of goods or services with stock warrants. The two main rules to account for stock warrants are that the issuer must recognize the fair value of the equity instruments issued or the fair value of the consideration received, whichever can be more reliably measured; and recognize the asset or expense related to the provided goods or services at the same time.

The following additional conditions apply to more specific circumstances:

  • Option expiration. If the grantor recognizes an asset or expense based on its issuance of warrants to a grantee, and the grantee does not exercise the warrants, do not reverse the asset or expense.

  • Equity recipient. If a business is the recipient of warrants in exchange for goods or services, it should recognize revenue in the normal manner.

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GAAP Guidebook

The grantor usually recognizes warrants as of a measurement date. The measurement date is the earlier of the date when the grantee’s performance is complete; or the date when the grantee’s commitment to complete is probable, given the presence of large disincentives related to nonperformance. Note that forfeiture of the warrant instrument is not considered a sufficient disincentive to trigger this clause.

If the grantor issues a fully vested, nonforfeitable warrant that can be exercised early if a performance target is reached, the grantor measures the fair value of the instrument at the date of grant. If early exercise is granted, measure and record the incremental change in fair value as of the date of revision to the terms of the instrument. Also, recognize the cost of the transaction in the same period as if the company had paid cash, instead of using the equity instrument as payment.

The grantee must also record payments made to it with equity instruments. The grantee should recognize the fair value of the equity instruments paid using the same rules applied to the grantor. If there is a performance condition, the grantee may have to alter the amount of revenue recognized, once the condition has been settled.

Example of Stock Warrant Accounting

Armadillo Industries issues fully vested warrants to a grantee. The option agreement contains a provision that the exercise price will be reduced if a project on which the grantee is working is completed to the satisfaction of Armadillo management by a certain date.

In another arrangement, Armadillo issues warrants that vest in five years. The option agreement contains a provision that the vesting period will be reduced to six months if a project on which the grantee is working is accepted by an Armadillo client by a certain date.

In both cases, the company should record the fair value of the instruments when granted, and then adjust the recorded fair values when the remaining provisions of the agreements have been settled.

Additional Example of Stock Warrant Accounting

Gatekeeper Corporation operates a private toll road. It contracts with International Bridge Development (IBD) to build a bridge along the toll way. Gatekeeper agrees to pay IBD $10,000,000 for the work, as well as an additional 1,000,000 warrants if the bridge is completed by a certain date. IBD agrees to forfeit $2,000,000 of its fee if the bridge has not been completed by that date. The forfeiture clause is sufficiently large to classify the arrangement as a performance commitment.

Gatekeeper should measure the 1,000,000 warrants at the performance commitment date, which have a fair value of $500,000. Gatekeeper should then charge the $500,000 to expense over the normal course of the bridge construction project, based on milestone and completion payments.