Question

Debate 15?1?The Nature of Stock Options

In the 1990 discussion memorandum “Distinguishing between Liability and Equity Instruments and Accounting for Instruments with Characteristics of Both,” the FASB presented arguments relating to the presentation and measurement of a company’s stock options and warrants. Under current GAAP, stock options and warrants are measured at the historical fair value of consideration received at issuance. The amount received is reported as an element of stockholders’ equity.

Some theorists argue that stock options and warrants represent obligations of the issuing entity and should be reported as liabilities. Moreover, a more appropriate measure would be fair value of the options or warrants at the balance sheet date.

Team Debate:                                      

Team 1:

Argue for the current GAAP treatment for the issuance and subsequent reporting of stock options and warrants.

Team 2:

Argue for reporting stock options and warrants as liabilities measured at current fair value.

Answer 1

Warrants and Options Shall be accounted simliar to Equity Instruments

Only One Exception to the Warrants is with respect to Puttable Warrants shall be classified as Liability since put option allows the buyer to force the seller to buy the option for a given price which is lowe than the strike price there by it gives some protection to the buyers even if warrant fails to surpass the strike price

There by Follow treatment of Current GAAP which is more reasonable explained above to do so