The Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU), which, if finalized, would provide guidance, including the following, to clarify an issuer’s accounting for modifications or exchanges of freestanding equity-classified forwards and options (e.g., warrants) that remain equity classified after modification or exchange and are not within the scope of Topic 718, “Compensation – Stock Compensation” of the FASB’s Accounting Standards Codification (ASC):

• An entity would treat such a transaction as an exchange of the original instrument for a new instrument.
• An entity would measure the effect of such a transaction as the excess of the fair value of the modified or exchanged instrument over the fair value of the original instrument immediately before it is modified or exchanged.
• An entity would recognize the effect of such a transaction on the basis of the substance of the transaction, in the same manner as if cash had been paid as consideration, as follows:
  • For a financing transaction to raise equity, the effect would be recognized as an equity-issuance cost in accordance with ASC 340, “Other Assets and Deferred Costs.”
  • For a financing transaction to raise or modify debt, the effect would be recognized as a cost in accordance with the guidance in ASC 470, “Debt,” and ASC 835, “Interest.”
  • For other modifications or exchanges that are not related to financings or compensation for goods or services or other exchange transactions within the scope of another ASC Topic, the effect would be recognized as a dividend. That dividend would be an adjustment to net income (or net loss) in the basic earnings-per-share calculation.
• An entity would recognize the effect of a modification or an exchange of a freestanding equity-classified forward or option to compensate for goods or services in accordance with the guidance in ASC 718, “Compensation – Stock Compensation.”
• In a multiple element transaction (e.g., one that includes both debt financing and equity financing), the total effect of the modification would be allocated to the respective elements in the transaction.

The proposed ASU is available for comment until December 28, 2020.