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Int. Acc. FA LECT 5&6: CH 16 part 3: Dilutive securities and EPS…
Int. Acc. FA LECT 5&6: CH 16 part 3: Dilutive securities and EPS
Describe the accounting for convertible preference shares.
(Generally) not a compound instrument: only equity.
Journal entries upon conversion: only shifting between
different equity accounts.
Include option to convert preference shares into X number of ordinary shares
Upon conversion/repurchase: no gain/loss
Describe the accounting for share warrants.
Similar to convertible securities, except that upon exercise of warrants, the holder has to pay a certain amount to obtain the shares.
When are warrants typically issued?
Include warrants to make certain types of securities more
attractive;
To give existing shareholders the pre-emptive right to purchase ordinary shares first when new ordinary shares are issued.
Executive compensation
Certificates that give holder the right to acquire shares at a certain price within a stated period.
Warrants vs options
Option
Standardized
Secondary market instrument
Contract
Trading between investors
Option gives the buyer the right, not the obligation to buy or sell the stock at the specified price on a certain date.
On the exercise of option one investor gives or receives shares to/from another investor.
Warrant
Non-standardized
Primary market instrument
Security
Warrants are issued by company or financial institution.
Warrants refers to an instrument registered and traded separately, which gives the holder the right to get specified number of shares at a predetermined price and date.
On the exercise of warrant shares which meet out the obligations are received directly from the company.
Warrants issued with other securities
Detachable/Non-detachable.
If attached to bond: use with-and-without method to separate equity and liability components.
Option to buy ordinary shares at a fixed price.
Note: The bond isn’t converted when warrants are exercised. So the exercise of warrants doesn’t mean that bonds payable is debited
.