Malaysian Institute of Accountants
Financial Reporting Standards Implementation Committee (FRSIC)
ACCOUNTING FOR RIGHTS ISSUE WITH FREE WARRANT
The issues:
An entity undertook a rights issue exercise. Every one existing ordinary share is
entitled to one new ordinary share of $1.00 par and one free call warrant for a
consideration of $1.00.
The market price of the existing ordinary share as at the date of the rights issue is
$0.80, whilst the fair value of the warrant is $0.30.
(a) Should the $1.00 proceed to be received be allocated between the new ordinary
share and the free warrant?
(b)
If yes, what is the basis of an appropriate allocation?
(c)
If upon allocation, the amount allocated to the ordinary share is below the par
value, how should this ‘discount’ be accounted for?
Current practice:
Most entities would allocate the entire $1.00 proceed to the ordinary share. No
amount is allocated to the warrant.
Reasons for the FRSIC to address the issue:
Rights issue with free warrant is a very common corporate exercise in Malaysia.
Guidance on the appropriate accounting treatment would be helpful to Malaysian
preparers.
Proposed Consensus:
From the issuer’s perspective, the rights issue exercise involves the issue of two
equity instruments: (i) ordinary shares, and (ii) warrant. Although the call warrant is
issued to shareholders for free, in substance, the proceeds of $1.00 received is for
two equity instruments. From the shareholder’s perspective, the shareholder would
have recognized investment in two equity instruments.
Accordingly, the $1.00 proceeds should be allocated between the two equity
instruments using an appropriate allocation method. There are no guidance in the
FRSs on this subject, but a suggested allocation basis would be to allocate the
proceeds using the fair value of the two instruments on a prorate basis.
In the above example, the allocation using fair value would be as follows:
Allocated to ordinary share ($0.80 / $1.10) x $1.00
= $0.73
Allocated to warrant
= $0.27
($0.30 / $1.10) x $1.00
Total
$1.00
The accounting journal entry would be:
FRSIC ISSUE 2007/11
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Malaysian Institute of Accountants
Financial Reporting Standards Implementation Committee (FRSIC)
Dr. Cash
$1.00
Dr. Any suitable reserve
0. 27
Cr. Warrant
0.27
Cr. Share capital
1.00
The current practice of not allocating any value to the warrant would not be reflecting
the substance of the transaction. In addition, the financial statements would also not
be showing a fair reflection these two equity instruments.
FRSIC ISSUE 2007/11
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