Should Warrants Be Considered Derivatives? | BBD, LLP
Posted by admin Jul 26, 2012 3:12:00 PM
Current financial markets provide various incentives for entities interested in raising capital for their developing enterprises to offer potential investors. One example of an incentive used is a warrant issued along with a debt instrument. The warrants could theoretically be exercised at a future date for a common stock interest in the company, once the capital raised from the debt issuance begins to bear fruit and the enterprise value increases. For mutual and hedge funds investing in these developing companies, the financial statement disclosure requirements have drastically increased due to the Statement on Financial Accounting Standard No. 161, Disclosures about Derivative Instruments and Hedging Activities (the “Statement” or “FAS 161”). The Statement has been included in the FASB Codification (the “Code”) under 815-10 Derivatives and Hedging. FAS 161 was effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.
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