The Difference Between Stock Option and Warrant

February 18th, 2010

The terms “option” and “warrant” are sometimes used interchangeably. Indeed, from the perspective of a person who owns a stock option or stock warrant, there is no difference. That person has a contractual right to purchase  stock shares at price, on or before a future date. The number of shares, purchase price and date are set in the contract.

If the market price of the stock is higher than the option/warrant purchase price, it is an instantly profitable deal for the holder. They can purchase the shares in the morning, then sell them into the market in the afternoon for more than they spent in the morning. Buy low, sell high!

From the perspective of the company, however, options and warrants are very different. Companies issue warrants but they do not issue options (with one exception we’ll get to below).

Warrants:

  • are issued by the company to raise money or gain other economic benefit.
  • when exercised, the money is paid to the company.
  • when exercised, the shares are issued by the company.

Options:

  • are not issued by the company, but are a contract between two parties neither of whom is the company, both of whom are betting on the future market price of the already-issued shares.
  • when exercised, the money is not paid to the company but is paid by the first party to the second.
  • when exercised, the shares are not issued by the company but shares issued by the company are transferred from the second party to the first party.
  • the company may not even be aware that the option exists.

Here’s the exception:

“Employee stock options” are named wrong. They are actually warrants.

Posted in Accounting How-to | Make The First Comment »

SEC Comments Analyzed

January 29th, 2010

Deloitte, the auditing superpower, has published a survey of SEC comments in an attempt to figure out common areas where financial reports leave questions and gray area. It’s good reading for public market participants of all stripes.

Posted in Accounting How-to, Going Public | Make The First Comment »

New Investor Protection Raises Audit Costs

January 15th, 2010

The Securities and Exchange Commission today approved a new requirement that makes outside auditing costs for companies in the public capital arena more expensive. The government hopes the change will reduce errors in the financial statements that investors use to decide which stocks to buy and sell.

Prior to today’s action, public companies must have their annual financial statements audited by a PCAOB-registered auditing firm, and each of their three quarterly interim financial statements “reviewed” by a PCAOB-registered auditing firm.

Reviews do not require as much time and attention from the auditing firm as the annual audit does, and typically cost less than half the cost of an audit. Companies are required to file those quarterly interim statements within 45 days of quarter-end, while annual financial statements are allowed 90 days for compltion.

Each time an auditing firm finishes an audit, companies must pay for a senior CPA who has not been involved with the audit to review the work of the firm (a process called the “concurring review”) in hopes of finding errors that the audit may have missed.

The SEC’s action today will expand the use of concurring reviews to each of the three interim quarterly “reviews” as well as the annual audit. Similar to a tax hike, the cost will be passed along to American consumers.

Companies will start paying for the additional services starting with their first quarter’s financial statement due on or after May 15, 2010.

Posted in Business Environment, Government | Make The First Comment »

Footnote Notes: Recent Accounting Pronouncements

December 28th, 2009

ASC 235-10-50-3 describes footnote disclosures required for financial statements to conform to GAAP, and the term “Recent Accounting Pronouncements” does not appear. Nevertheless, public companies large and small devote at least a couple of pages to describing new accounting standards, and what effect they will have on the company.

Even ASC 235-10-S99-1, which repeats “Regulation S-X Rule 4-08, General Notes to Financial Statements,” doesn’t require “Recent Accounting Pronouncements.”

The pages of dense Recent Accounting Pronouncements are, in fact, a requirement of government regulators, not CPAs. The SEC’s Corporate Finance group’s   Topic 11 of the codification of Staff Accounting Bulletins is where you’ll find the requirement.

M. Disclosure Of The Impact That Recently Issued Accounting Standards Will Have On The Financial Statements Of The Registrant When Adopted In A Future Period

Facts: An accounting standard has been issued that does not require adoption until some future date. A registrant is required to include financial statements in filings with the Commission after the issuance of the standard but before it is adopted by the registrant.

Question 1: Does the staff believe that these filings should include disclosure of the impact that the recently issued accounting standard will have on the financial position and results of operations of the registrant when such standard is adopted in a future period?

Interpretive Response: Yes. The Commission addressed a similar issue with respect to Statement 52 and concluded that “The Commission also believes that registrants that have not yet adopted Statement 52 should discuss the potential effects of adoption in registration statements and reports filed with the Commission.”  The staff believes that this disclosure guidance applies to all accounting standards which have been issued but not yet adopted by the registrant unless the impact on its financial position and results of operations is not expected to be material.

The bold face was added by us. It leaves issuers in a difficult position. Issuers must win the approval of an SEC staff analyst who will be assigned to review their filing, and the language leaves the requirement open to interpretation by the analyst.

Should the filer include all recently issued pronouncements not yet adopted (which can run several pages) and explicitly note a lack of materiality, or should the filer omit pronouncements that are not expected to be material? If they take the latter course, will their filing draw SEC attention because the analyst-reviewer cannot tell if the issuer has failed to consider a particular recent pronouncement, or if the missing pronouncement has been considered and omitted because of immateriality?

FASB maintains this master list of Accounting Pronouncements, recent and otherwise.

Posted in GAAP | Make The First Comment »

Supreme Court Hearing Yesterday On PCAOB

December 8th, 2009

Here’s a report from WebCPA.com.

Posted in Government | Make The First Comment »

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