Under ASC 820: Fair Value Measurements and Disclosures, all of a stock warrant’s features must be reflected in the valuation process your company uses. This will quickly rule out simplified techniques (e.g., the Black-Scholes formula) for warrant instruments containing make-whole provisions, contingent exercise provisions, or other complex features, and may even do so for plain-vanilla warrants. As a result, a warrant valuation can be challenging to determine and validate.
Improperly formed values can adversely affect stockholder equity and borrowing costs. Because warrants are often used by companies as a “sweetener” to provide extra incentive for a deal, this can also lead to over- or under-sweetening of various types of financing transactions. What’s more, audit fees or regulatory fines due to fair value errors or incomplete documentation can easily turn out to be higher than the cost to get the valuation right the first time around.
Stock Warrant Valuation Services
Equity Methods provides organizations with a stock warrant valuation via the following process:
- Review the appropriate GAAP accounting for the warrant instrument
- Identify all of the warrant’s unique features that will require custom modeling and handling. Important features that need to be carefully identified and modeled include the following (among others):
- Warrant adjustments due to down round protection, dilution, or firm performance conditions
- Caps on the value of warrants
- Limitations on exercise over certain periods
- Contingencies which link the warrant to other financial instruments, such as a warrant which cannot be exercised until a certain debt instrument is repaid
- Test variables and assumptions within the valuation model
- Provide comprehensive documentation to help issuers streamline the external audit process
- Update the valuation model each quarter in a cost-effective way for warrants that require fair value to be marked-to-market
Eliminate costly audit time with our custom valuation modeling performed with informed assumptions.