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 »
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 »
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 »
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 SEC’s Corporate Finance group offers some guidance in it’s Frequently Requested Accounting and Financial Reporting Interpretations and Guidance that also references Topic 11 of the codification of Staff Accounting Bulletins. Both documents make it clear that the SEC is looking for issuers to include in its annual financial statements the impact of recent accounting pronouncements that have not yet been adopted by the company.
FASB maintains this master list of Accounting Pronouncements, recent and otherwise.
Posted in GAAP | Make The First Comment »
