IFRS IC on the accounting treatment of warrants

Keywords: Mazars, Thailand, IFRS, IFRS IC, IASB, IAS 32, FICE

28 December 2021

The IFRS IC published its final decision is available here. 

The warrants in question provided the holder with the right to buy a fixed number of the issuer's equity instruments for a variable exercise price that will be fixed at a future date and remain so for the residual term of the contract. At initial recognition, the issuer classified these instruments as financial liabilities because the variability in the exercise price did not meet the ‘fixed-for-fixed condition’ (i.e. exchanging a fixed amount of cash for a fixed number of its own equity instruments) for classification in equity under IAS 32.16.

The request asked if it was possible to reclassify the warrant as an equity instrument following the fixing of its exercise price, given that the fixed-for-fixed condition would at that stage be met.

In its decision, the IFRS IC observed that IAS 32 does not address the question of reclassifying financial liabilities as equity instruments after initial recognition when the instrument’s contractual terms are unchanged, and that similar questions arise in other circumstances.

Nonetheless, the reclassification of instruments by the issuer has been identified as one of the practical issues the Board will consider addressing in its Financial Instruments with Characteristics of Equity (FICE) project. The Committee therefore proposed it should be considered as part of the FICE project. An exposure draft will be published at a date not yet announced in the IASB’s work plan.