Discussion on Accounting Treatment of Common Stock Warrants Issued by Issuers
A company issues common stock warrants to external entities at a fair value exercise price in exchange for advertising services. After analysis under ASC 480 and ASC 815-40, the warrants are classified as equity. This article discusses whether accounting recognition is required at issuance, the entries upon exercise, and special accounting considerations when the exercise price exceeds fair value.
A company issues common stock warrants to an external entity with an exercise price equal to fair value as consideration for advertising services. The company has evaluated under ASC 480 (Distinguishing Liabilities from Equity) and determined that these warrants are subject to ASC 815-40 (Derivatives and Hedging—Contracts in Entity's Own Equity) and should be classified as equity. Then, is accounting treatment required at issuance? On the surface, it seems no accounting event needs to be recognized at issuance—this is merely an option to purchase shares at fair value—and upon exercise, the following journal entry should be recorded:
Debit: Cash (number of warrants × exercise price)
Credit: Equity (number of warrants × exercise price)
Am I missing any journal entries?
Additionally, if the exercise price is higher than fair value, is there any special accounting treatment?