Subtopic

ASC 480, Distinguishing Liabilities from Equity Topic, contains one Subtopic:

• ASC 480-10, Overall, which provides guidance on how an issuer classifies and measures financial instruments with characteristics of both liabilities and equity.

Scope and Scope Exceptions

ASC 480 applies to all entities and to any freestanding financial instrument. This includes one that:

• Comprises more than one option or forward contract
• Has characteristics of both a liability and equity and, in some circumstances, also has characteristics of an asset.

ASC 480 does not address an instrument that has only characteristics of an asset. ASC 480 does not apply to:

• A feature embedded in a financial instrument that is not a derivative instrument in its entirety.
• An obligation under share-based compensation arrangements if that obligation is accounted for under Topic 718.

(Also see the Applicability of ASC 480 section in this chapter or an expanded discussion of which instruments fall under the scope of ASC 480.)

Overview

Standard setters had been struggling with the proper reporting for hybrid instruments—instruments having characteristics of both liabilities and equity. Two needs had been perceived:

• first, to establish criteria for classification for certain instruments (e.g., mandatorily redeemable stock) that nominally are equity but have key characteristics of debt, but which will significantly impact corporate statements of financial position if a “substance over form” approach is strictly enforced; and
• second, to develop the methodology for disaggregating the constituent parts of compound instruments so that they may be accounted for as debt and as equity, respectively.

ASC 480 addresses those needs.

Applicability of ASC 480

ASC 480 applies to all freestanding instruments, including those composed of more than one option or forward contract embodying obligations that require or that may require settlement by transfer of assets. It applies to three types of freestanding financial instruments:

• Mandatorily redeemable financial instruments
• Obligations to repurchase the issuer's shares by transferring assets
• Certain obligations to issue a variable number of shares.

Obligations to repurchase the issuer's equity shares by transferring assets include financial instruments, other than outstanding shares, that, at inception,

1. Embody obligations to repurchase the issuers' equity shares, or are indexed to such obligations, and
2. Require or may require the issuers to settle the obligations by transferring assets.

These must be classified as liabilities (or, rarely, as assets). Such obligations could include forward purchase contracts or written put options on an issuer's equity shares that are to be physically settled or net cash settled.

Certain obligations to issue a variable number of shares are financial instruments that embody unconditional obligations, or financial instruments other than outstanding shares that embody conditional obligations, that the issuers must or may settle by issuing variable numbers of equity shares. These obligations also must be classified as liabilities (or, rarely, as assets) if, at inception, the monetary values of the obligations are based solely or predominantly on any one of the following:

1. A fixed monetary amount known at inception (e.g., a payable settleable with a variable number of the issuer's equity shares);
2. Variations in something other than the fair value of the issuer's equity shares (e.g., a financial instrument indexed to the S&P 500 and settleable with a variable number of the issuer's equity shares); or
3. Variations inversely related to changes in the fair value of the issuer's equity shares (e.g., a written put option that could be net share settled).

If a freestanding instrument is composed of more than one option or forward contract and one of those contracts embodies an obligation to repurchase the issuer's shares that require or may require settlement by a transfer of assets, the financial instrument is a liability. In addition, if a freestanding instrument composed of more than one option or forward contract includes an obligation to issue shares, the various component obligations must be analyzed to determine if any of them would be obligations under ASC 480. If one or more would be obligations under this standard, then judgment must be used to determine if the monetary value of the obligations that would be liabilities is collectively predominant over the other component liabilities. If so, the instrument is a liability. If not, the instrument is outside the scope of ASC 480. Following is a list of examples of these types of financial instruments:

• Puttable warrant
• Warrant for shares that can be put by the holder immediately after exercise
• Warrant that allows the holder to exercise the warrant or put the warrant back to the issuer on the exercise date for a variable number of shares with a fixed monetary value
• Forward contract in which the number of shares to be issued depends on the issuer's share price on the settlement date
• Warrant with a “liquidity make-whole” put to issue additional shares to the holder if the sales price of the shares when later sold is less than the share price when the warrant is exercised
• Warrant that allows the holder to exercise the warrant or, if contingent event does not occur, put the warrant back to the issuer on the exercise date for a variable number of shares with a fixed monetary value.

Put options. ASC 480-10-55 provides examples of put options that are subject to only cash payment and also of those that could be settled by an issuance of stock. The former case is straightforward: the instrument must be classified as a liability if the share price at the reporting date is such that a cash payment would be demanded by the holders of the puttable warrants. If the share price at that date is such that exercise of the warrant would be elected over exercise of the put option, then the warrant would be included in equity, not in liabilities. In other words, classification would depend on current stock price and could change from period to period, although ASC 480-10-55 is not explicit on this point.

Other put arrangements call for settlement in shares. That is, if advantageous to do so, the warrant holders exercise the warrants and acquire shares, but if the strike price has not been attained at expiration date, the put is exercised and the reporting entity would have to settle, but instead of paying cash it would issue shares having an aggregate value equal to the put amount. Thus, at inception, the number of shares that the puttable warrant obligates the reporting entity to issue can vary, and the instrument must be examined under the provisions of ASC 480 that deal with obligations to issue a variable number of shares. The facts and circumstances must be considered in judging whether the monetary value of the obligation to issue a number of shares that varies is predominantly based on a fixed monetary amount known at inception; if so, it is a liability under ASC 480.

Put warrant. A detachable put warrant can either be put back to the debt issuer for cash or can be exercised to acquire common stock. These instruments should be accounted for in the same manner as a mezzanine security. The proceeds applicable to the put warrant ordinarily are to be classified as equity and should be presented between the liability and equity sections in accordance with SEC ASR 268. (ASC 480-10-S99)

In the case of a warrant with a put price substantially higher than the value assigned to the warrant at issuance, however, the proceeds should be classified as a liability since it is likely that the warrant will be put back to the company.

Warrant. Yet another variation illustrated by ASC 480-10-55 is the warrant for the purchase of shares, where the shares are puttable. The holder can exercise the warrant and then immediately force the issuer to repurchase the shares issued. The price at which the shares could be put would be defined in the warrant, and the likelihood that the put option would be exercised would vary with the market value of the shares. Obviously, if the shares acquired by exercise of the warrant had a greater market value than the put price, the put would not be invoked. Accordingly, whether these warrants would be classified as equity or liability would depend on the market value of the underlying shares, and this could change from the date of one statement of financial position to that of the next. However, if the shares to be issued upon warrant exercise were to have a mandatory redemption feature, then the warrants would be reportable as liabilities in any case.

ASC 480-10-55 offers several other examples, illustrating more complex features that may be found in stock purchase warrants which, depending on circumstances, might necessitate classification as liabilities in the statement of financial position.

The standard does not apply to or affect the timing of recognition of financial instruments issued as contingent consideration in a business combination, nor the measurement guidance for contingent consideration, as set forth in ASC 805. It also does not affect accounting for stock-based compensation or ESOP plans. (ASC 718)

Initial and Subsequent Measurements

Mandatorily redeemable financial instruments are reported as liabilities and are initially recognized at fair value. Mandatorily redeemable financial instruments are subsequently remeasured using fair value, with any adjustments included in the periodic determination of income. In general, the value of mandatorily redeemable financial instruments will be accreted over time and the accretion will be treated as interest expense. The method of determining subsequent fair values corresponds to that set forth in the following paragraph.

Forward contracts that require physical settlement by repurchase of a fixed number of the issuer's equity shares in exchange for cash are measured initially at the fair value of the shares, as adjusted for any consideration or unstated rights or privileges. Equity is reduced by this same amount. Fair value in this context may be determined by reference to the amount of cash that would be paid under the conditions specified in the contract if the shares were repurchased immediately. Alternatively, the settlement amount can be discounted at the rate implicit at inception after taking into account any consideration or unstated rights or privileges that may have affected the terms of the transaction.

Subsequent measurement can be effected by either:

• accretion (which is feasible only if the amount to be paid and the settlement date are both fixed), or
• by determining the amount of cash that would be paid under the conditions specified in the contract if settlement occurred at the reporting date (useful when either the amount to be paid or the settlement date vary based on defined conditions and terms).

In either case, the change from the amount reported in the prior period is interest expense. If accretion is appropriate, the instruments are to be measured subsequently at the present value of the amount to be paid at settlement, accruing interest cost using the rate implicit at inception.

Conditionally redeemable instruments, first classified as equity and transferred to liabilities when the condition is satisfied, are measured at fair value at that date, with no gain or loss being recognized from the reclassification. For earnings per share computation purposes, the amount of common shares that are to be redeemed or repurchased is excluded for both basic and diluted calculations.

Mandatorily Redeemable Shares and Similar Instruments

A mandatory redemption clause requires common or preferred stock to be redeemed (retired) at a specific date(s) or upon occurrence of an event which is uncertain as to timing, although ultimately certain to occur. This feature is in contrast to callable preferred stock, which is redeemed at the issuing corporation's option. Mandatory redemption features are not uncommon in practice; closely held corporations, for example, have “buy-sell” agreements to redeem the shares of retiring or deceased owners at formula prices, often book value. Historically, the mandatory redemption feature has been ignored in determining statement of financial position classification for nonpublic companies. On the other hand, for publicly held companies, mandatorily redeemable shares (which are almost always preferred stock in these situations) had to be displayed as either debt or as a “mezzanine equity” item separate from stockholders' equity.

If the stock subject to mandatory redemption provisions represents the only shares in the reporting entity, it must, under ASC 480, report those instruments in the liabilities section of its statement of financial position, and describe them as shares subject to mandatory redemption, so as to distinguish the instruments from other financial statement liabilities.

Although mandatorily redeemable instruments may be equity in legal form, ASC 480 requires that they be reported as liabilities rather than equity instruments to the extent they represent the issuer's obligation to transfer assets. Payments or accruals of “dividends” and other amounts to be paid to holders of such shares are to be reported as interest expense. The only exception to those rules is for shares that are required to be redeemed only upon the liquidation or termination of the issuer, since the fundamental “going concern assumption” underlying GAAP financial statements means that such an eventuality is not given recognition.

For all other financial instruments that are mandatorily redeemable, the classification, measurement, and disclosure provisions of ASC 480 were deferred indefinitely for nonpublic entities, pending further FASB action.¹

Financial statement preparers should not presume that this application of ASC 480 will be rescinded, although that remains a possibility. There would not appear to be a conceptually sound argument for why public entities having such mandatorily redeemable instruments would be required to report these as liabilities, while granting nonpublic ones an exemption.

Note: as set forth in ASC 480-10-65, that deferral of the disclosure requirements under ASC 480, as described above, does not remove the requirements under ASC 505-10-50, which requires the disclosure of information about the pertinent rights and privileges of the various securities outstanding, including mandatory redemption requirements.

ASC 480-10-65 has also deferred indefinitely the measurement provisions of ASC 480, both as to the parent in consolidated financial statements and as to the subsidiary that issued the instruments that resulted in mandatorily redeemable noncontrolling interests before November 5, 2003. For those instruments, the measurement guidance for redeemable shares and noncontrolling interests under GAAP (e.g., ASC 480-10-S99) continues to apply during the deferral period. However, the classification provisions were not deferred.

The SEC subsequently further clarified the interaction between ASC 480 and D-98 for conditionally redeemable shares. Accounting for these shares, prior to the date on which the condition is first met, is not governed by ASC 480, but for a publicly held company the shares would not be permitted to be included in equity. A “mezzanine” classification would be acceptable until the condition is met, at which point reclassification as liabilities is necessary. Reclassification is akin to redemption, to be recognized at fair value via a charge or credit to equity, with concomitant impact on earnings per share computations in the period when the reclassification takes place. The only exception to this requirement exists in the circumstance where the redemption is required to occur only upon the liquidation or termination of the reporting entity. Since financial statements are prepared under the assumption of a going concern, it would be inconsistent to classify this type of redeemable stock as a liability. (ASC 480-10-25-4)

If on the date of adoption the redemption price is greater than the book value of the shares, the company would recognize a liability for the redemption price of the shares that are subject to mandatory redemption, reclassifying amounts previously recognized in equity accounts. The difference between the redemption price and amounts previously recorded in equity is reported on the income statement as a cumulative effect transition adjustment loss. If the redemption price exceeds the company's equity balance, the cumulative transition loss should be reported as an excess of liabilities over assets (a deficit in the stockholders' equity section). In the opposite case, it is reported as an excess of assets over liabilities (i.e., as positive equity).

Shares are mandatorily redeemable if the issuer has an unconditional obligation to redeem the shares by transferring its assets at a specified or determinable date (or dates) or upon an event certain to occur (for example, the death of the holder). The obligation to transfer assets must be unconditional—that is, there is no specified event that is outside the control of the issuer that will release the issuer from its obligation. Thus, callable preferred shares, which are redeemable at the issuer's option, and convertible preferred shares, which are redeemable at the holder's option, are not mandatorily redeemable shares.

ASC 480 requires this reporting for all mandatorily redeemable financial instruments, unless the redemption is required to occur only upon the liquidation or termination of the reporting entity. The exception exists because the fundamental going concern assumption underlying GAAP financial reporting would be violated if a classification was imposed in GAAP financial statements that presumed or was conditioned on the reporting entity's cessation as a going concern. However, the exception under ASC 480 does not extend to mandatorily redeemable financial instruments of a consolidated subsidiary, in the consolidated financial statements of its parent entity. Since it is the going concern status of the reporting entity (i.e., the parent) that is of significance, the mandatory redemption feature of the subsidiary's instruments, albeit conditional, is to be reported consistent with ASC 480's provisions.

If the redemption price of mandatorily redeemable shares is greater than the book value of those shares, the company should report the excess as a deficit (equity), even though the mandatorily redeemable shares are reported as a liability.

After issuance, the amount of the liability for the mandatorily redeemable shares should be adjusted using the effective interest method if both the amount to be paid and the settlement date are fixed. If either the amount to be paid or the settlement date varies based on specified conditions, the liability is measured subsequently at the amount of cash that would be paid under the conditions specified in the contract if settlement occurred at the reporting date, recognizing the resulting change in that amount from the previous reporting date as interest cost.

If shares have a conditional redemption feature, which requires the issuer to redeem the shares by transferring its assets upon an event not certain to occur, the shares become mandatorily redeemable—and, therefore, become a liability—if that event occurs, the event becomes certain to occur, or the condition is otherwise resolved. The fair value of the shares is reclassified as a liability, and equity is reduced by that amount, recognizing no gain or loss. An assessment must be made each reporting period to ascertain whether the triggering event has yet occurred. If it has, reclassification of the conditionally mandatorily redeemable stock to liabilities must be effected.

ASC 480 offers two such examples. First, if shares are to become mandatorily redeemable upon a change in control of the issuing corporation, these remain classified within equity until that event occurs, if ever. When it does occur, the equity is reclassified to liabilities, measured at the fair value at that date, with no gain or loss recognized. Any disparity between the carrying value of the equity and the amount transferred to liabilities would therefore remain in equity as additional paid-in capital or as a reduction to paid-in capital or to retained earnings.

Another example of conditional mandatory redemption would occur when preferred stock is issued with a mandatory redemption at a date certain, say ten years hence, conditioned on the failure of the preferred stockholders to exercise the right to convert to common stock before another defined date, say five years from issuance. For the first five years, the preferred stock would be displayed as equity, since the mandatory redemption feature has yet to become activated. If the shareholders elect to exchange the preferred stock to common stock, the usual accounting for such conversions would apply. If the five-year period elapses and the preferred shares are not exchanged, the mandatory redemption provision becomes effective, and the preferred stock is to be reclassified to liabilities, measured at fair value.

Accounting for mandatorily redeemable financial instruments of a nonpublic reporting entity that are redeemable on fixed dates for amounts that are fixed or tied to an external index must be conformed to the requirements outlined above. For all other mandatorily redeemable financial instruments issued by nonpublic entities that are not SEC registrants, the classification, measurement, and disclosure provisions are deferred indefinitely. For mandatorily redeemable noncontrolling interests that would not be classified by the subsidiary as liabilities (because they are redeemable only upon liquidation) but would be classified by the parent as liabilities on the consolidated statements, the classification and measurement provisions of ASC 480 are deferred indefinitely. For other mandatorily redeemable noncontrolling interests that were issued before November 5, 2003, the measurement provisions of ASC 480 were deferred indefinitely, but the classifications provisions are not deferred.

In addition to the requirement of ASC 480, expanded disclosure of mandatorily redeemable common or preferred stock is required by ASC 505-10-50. Specifically, the redemption requirements for each of the next five years must be set forth in the notes to the financial statements prepared in accordance with GAAP, if the amounts are either fixed or determinable on fixed or determinable dates. Thus, readers can interpret the cash requirements on the reporting entity in a manner similar to the drawing of inferences about other fixed commitments, such as maturities of long-term debt and lease obligations. (ASC 480-10-65-1)

Note that when redemption value is based on a notion of fair value, defined in the underlying agreement, the initial recognition of the difference between this computed amount and the corresponding book value will almost inevitably result in a surplus or deficit. In other words, the promised redemption amounts, measured at transition and again at the date of each statement of financial position, will not equal the book value of the equity which is subject to redemption. This discrepancy must be reflected in stockholders' equity, even though the redeemable equity is reclassified to a liability. In effect, the redemption arrangement will result in either a residual in equity (assuming that a redemption was to fully occur at the date of the statement of financial position) or a deficit, because the agreement provides that redeeming shareholders are entitled to more or less than their respective pro rata shares of the book value of their equity claims. If the redemption price of mandatorily redeemable shares is greater than the book value of those shares, the company should report the excess as a deficit (equity), even though the mandatorily redeemable shares are reported as a liability.

Common shares that are mandatorily redeemable are not included in the denominator when computing basic or diluted earnings per share. If any amounts, including contractual (accumulated) dividends, attributable to shares that are to be redeemed or repurchased have not been recognized as interest expense, those amounts are deducted in computing income available to common shareholders (the numerator of the calculation), consistently with the “two-class” method set forth in ASC 260. The redemption requirements for mandatorily redeemable shares for each of the next five years are required to be disclosed in the notes to the financial statements.

ASC 480-10-S99 addresses concerns raised by the SEC regarding the financial statement classification and measurement of securities subject to mandatory redemption requirements or whose redemption is outside the control of the issuer. Questions also arose regarding disclosures needed to comply with SEC requirements.

These rules require securities with redemption features that are not solely within the control of the issuer to be classified outside of permanent equity. The SEC staff believes that all of the events that could trigger redemption should be evaluated separately and that the possibility that any triggering event that is not solely within the control of the issuer could occur—without regard to probability—would require the security to be classified outside of permanent equity. Determining whether an equity security is redeemable at the option of the holder or upon the occurrence of an event that is solely within the control of the issuer can be complex. Accordingly, all of the individual facts and circumstances should be considered in determining how an equity security should be classified.

ASC 480-10-S99 offers several examples of complex fact patterns to help registrants in determining whether classification as a liability or as equity would be appropriate.

For example, if a preferred security has a redemption provision stating that it may be called by the issuer upon an affirmative vote by the majority of its board of directors, but the preferred security holders control a majority of the votes of the board of directors through direct representation on the board of directors or through other rights, the preferred security is effectively redeemable at the option of the holder and its classification outside of permanent equity is required. Thus, in assessing such situations, any provision that requires approval by the board of directors cannot be assumed to be within the control of the reporting entity itself. All of the relevant facts and circumstances would have to be considered.

As another example, if a security with a deemed liquidation clause that provides that the security becomes redeemable if the stockholders of the reporting entity (those immediately prior to a merger or consolidation) hold, immediately after such merger or consolidation, stock representing less than a majority of the voting power of the outstanding stock of the surviving corporation, this would not be permanent equity. A purchaser could acquire a majority of the voting power of the outstanding stock, without company approval, thereby triggering redemption.

Securities with provisions that allow the holders to be paid upon occurrence of events that are solely within the issuer's control should thus always be classified outside of permanent equity. Such events include:

1. The failure to have a registration statement declared effective by the SEC by a designated date
2. The failure to maintain compliance with debt covenants
3. The failure to achieve specified earnings targets
4. A reduction in the issuer's credit rating.

ASC 480-10-S99 notes that if a reporting entity issues preferred shares that are conditionally redeemable (e.g., at the holder's option or upon the occurrence of an uncertain event not solely within the company's control), the shares are not within the scope of ASC 480 because there is no unconditional obligation to redeem the shares by transferring assets at a specified or determinable date or upon an event certain to occur. If the uncertain event occurs, the condition is resolved, or the event becomes certain to occur, then the shares become mandatorily redeemable under FAS 150 and would require reclassification to a liability. Under SEC rules, however, these shares cannot be included in permanent equity, and thus would be displayed as a “mezzanine” equity category. Mezzanine capital is an SEC reporting concept that has no analog under GAAP rules.

ASC 480 requires that the issuer measure that liability initially at fair value and reduce equity by the amount of that initial measure, recognizing no gain or loss. ASC 480-10-S99 observes that this reclassification of shares to a liability is akin to the redemption of such shares by issuance of debt. Similar to the accounting for the redemption of preferred shares, to the extent that the fair value of the liability differs from the carrying amount of the preferred shares, upon reclassification that difference should be deducted from or added to net earnings available to common shareholders in the calculation of earnings per share.

Obligations to Issue Shares

If an entity enters into a contract that requires it or permits it at its discretion to issue a variable number of shares upon settlement, that contract is recognized as a liability if at inception the monetary value of the obligation is based solely or predominantly on one of the following criteria:

1. A fixed monetary amount known at inception (e.g., a $100,000 payable can be settled by issuing shares worth $100,000 at the then-current market value).
2. An amount that varies based on something other than the fair value of the issuer's equity shares (for example, a financial instrument indexed to the Dow that can be settled by issuing shares worth the index-adjusted amount at the then-current market value).
3. Variations inversely related to changes in the fair value of the entity's equity shares (i.e., a written put option that could be net share settled).

Contracts that meet one of the above criteria are recognized at fair value at the date of issuance and at every measurement date afterwards. The changes in the fair value are recognized in earnings unless the contract falls within the scope of ASC 718 and that statement requires the changes to be recognized elsewhere.

Obligations to Repurchase Shares

If an entity (the issuer) enters into a contract that obligates it to transfer assets to either repurchase its own equity shares or to pay an amount that is indexed to the price of its own shares, the contract is to be reported as a liability (or in certain cases, as an asset, if the fair value of the contract is favorable to the issuer). Examples of that type of financial instrument are written put options on the option writer's (issuer's) equity shares, and forward contracts to repurchase an issuer's own equity shares if those instruments require physical or net cash settlement. (If the repurchase obligation is a redemption feature of common or preferred shares issued, see “Mandatorily Redeemable Shares and Similar Instruments”.)

ASC 480 requires that an issuer classify a financial instrument that is within its scope as a liability (or as an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. ASC 480 addresses three types of freestanding financial instruments that embody obligations of the issuer: mandatorily redeemable financial instruments, obligations to repurchase the issuer's equity shares by transferring assets, and certain obligations to issue a variable number of shares. Instruments within the scope of ASC 480 should be classified and measured in accordance with ASC 480 per ASC 480-10-S99.

Written put options are measured initially and subsequently at fair value. Forward contracts are initially measured at the fair value of the shares to be repurchased (adjusted by any consideration or unstated rights or privileges) if the contract requires physical settlement for cash. The offset to the liability entry is a debit to equity. Subsequent to issuance, forward contracts are remeasured in one of two ways:

1. If both the amount to be paid and the settlement date are fixed, the contract is measured at the present value of the amount to be paid, computed using the rate implicit in the contract at inception.
2. If either the amount to be paid or the settlement date varies based on specified conditions, the contract is measured at the amount of cash that would be paid under the conditions specified in the contract if settlement occurred at the reporting date.

Under either measure, the amount of the change from the previous reporting date is recognized as interest cost.

An entity that has entered into a forward contract that requires physical settlement by repurchase of a fixed number of its equity shares of common stock in exchange for cash does not include those shares in the denominator when computing basic or diluted earnings per share. If any amounts, including contractual (accumulated) dividends, attributable to shares that are to be redeemed or repurchased have not been recognized as interest expense, those amounts are deducted in computing income available to common shareholders (the numerator of the calculation), consistently with the “two-class” method set forth in ASC 260.

Some corporations and partnerships, primarily closely held ones, issue shares or units that are redeemed at the death of the holder. If those shares or units represent the only shares or units in the entity, the entity reports those instruments as liabilities and describes them in its statement of financial position as shares (or units) subject to mandatory redemption, to distinguish them from other liabilities. The classification is unaffected by any insurance policies that the entity may have on the holders' lives. The entity presents interest expense and payments to holders of those instruments separately, apart from interest and payments to other creditors in its statements of income and cash flows. The entity also discloses that the instruments are mandatorily redeemable upon the death of the holders.

Application of ASC 480

The original classification should not be changed because of subsequent economic changes in the value of the put. The value assigned to the put warrant at issuance, however, should be adjusted to its highest redemption price, starting with the date of issuance until the earliest date of the warrants. Changes in the redemption price before the earliest put dates are changes in accounting estimates and changes after the earliest put dates should be recognized in income. If the put is classified as equity, the adjustment should be reported as a charge to retained earnings, and if the put is classified as a liability the adjustment is reported as interest expense.

Regardless of how the put is classified on the statement of financial position, the primary and fully diluted EPS should be calculated on both an equity basis (warrants will be exercised) and on a debt basis (put will be exercised) and the more dilutive of the two methods should be used.