VIEWPOINTS:
Applying IFRS® Standards in the Mining Industry
ACCOUNTING FOR SHARE
PURCHASE WARRANTS ISSUED
APRIL 2018
Background
A common feature of certain transactions entered into by mining
entities, in particular exploration stage companies, is the issuance
of units which comprise share capital (“shares”) and share pur-
chase warrants (“warrants”) as elements of consideration for the
transaction.
For example, a mining company (the issuer) may enter into a
financing arrangement requiring the issuance of warrants to
investors (the holder(s)) as part of the transaction, making the
financing arrangement more attractive to the investors. At the
same time, warrants may also be issued to brokers or under
writers as consideration for services provided. It is also common
for warrants to be issued in connection with other transactions,
comprising part of the consideration for specified services, such
as investor relations work.
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In general terms, a warrant is an instrument that entitles the
holder to buy an underlying security (e.g., share) of the issuing
company at an exercise price within a certain time frame.
Issue
How should a mining company (the issuer) account for share
purchase warrants issued, both at the time of issuance and
subsequently?
Mining Industry
Task Force on IFRS
International Financial Reporting
Standards (IFRS) create unique
challenges for mineral resource
companies. Financial reporting
in the sector is atypical due
to significant dierences
in characteristics between
mineral resource companies
and other types of companies.
The Chartered Professional
Accountants of Canada
(CPA Canada) and the
Prospectors & Developers
Association of Canada (PDAC)
created the Mining Industry
Task Force on IFRSto share
views on IFRSapplication issues
of relevance to mineral resource
companies. The task force views
are provided in a series of papers
that are available through free
download. These views are
of particular interest to chief
financial ocers, controllers
and auditors.
The views expressed in this
series are non-authoritative
and have not been formally
endorsed by CPA Canada,
PDAC or the organizations
represented by the task force
members.
1
Viewpoints
To determine the appropriate accounting for warrants by an issuer, it is critical to obtain a
complete understanding of the nature of the transaction giving rise to the issuance as well as
the specific terms and conditions of the warrants.
The nature of the transaction will determine whether the warrants issued are accounted for in
accordance with:
• IFRS2 Share-based Payment—Warrants issued in exchange for goods or services pro
vided to the mining company are generally within the scope of IFRS2. IFRS2 applies to
share-based payment transactions with some exceptions.
1
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• IAS32 Financial Instruments: Presentation and IFRS9—Financial Instruments—Warrants not
issued in exchange for goods or services are generally within the scope of IAS32/IFRS9.
The accounting guidance for instruments within each of these standards is dierent. For exam
ple, if the warrants are accounted for in accordance with:
-
• IFRS2, a company determines if the warrants are i) an equity-settled award, or ii) a
cash-settled award.
2
Following this determination, the company applies the specific
recognition and measurement guidance in IFRS2.
• IAS32/IFRS9, a company determines if the warrants are i) equity, or ii) a financial liabil
ity. Following this determination, the company applies the specific measurement guidance
in IFRSapplicable to each classification.
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Determining the nature of the transaction is especially important in situations where warrants,
with the same terms and conditions, are issued concurrently to dierent parties. For example,
in a public or private financing arrangement, identical warrants may be issued concurrently
to investors as part of the financing transaction, as well as to brokers and underwriters (i.e.,
commonly referred
to as “broker warrants”) as compensation for their
services provided.
Warrants for Services Provided
Mining companies commonly issue warrants to external service providers such as brokers,
underwriters or investor relation agencies.
Generally, such warrants are accounted for in accordance with IFRS2 as they are issued for
services provided to the mining company and typically would not meet the scope exemptions
in IFRS2.
3
1 Exceptions noted in IFRS2 paragraphs 3A-6.
2 A cash-settled share-based payment transaction is a share-based payment transaction in which the entity acquires goods or
services by incurring a liability to transfer cash or other assets to the supplier of those goods or services for amounts that are
based on the price (or value) of equity instruments (including shares or share options) of the entity or another group entity. An
equity-settled share-based payment transaction is a share- based payment transaction in which the entity receives goods or
services a) as consideration for its own equity instruments (including shares or share options), or b) has no obligation to settle
the transaction with the supplier.
For cash-settled share-based payment transactions, the goods or services acquired and the liability incurred are measured at
the fair value of the liability. Until the liability is settled, the liability is remeasured at fair value at each reporting date (and the
settlement date). Any changes in fair value are recognized in profit or loss for the period.
3 Exceptions noted in IFRS2 paragraphs 3A-6.
2 Viewpoints: Applying IFRS® Standards in the Mining Industry | Accounting For Share Purchase Warrants Issued April 2018
Under IFRS2, transactions in which external services are received as consideration for equity
instruments of the company should be measured at the fair value of the goods or services
received. Only if the fair value of the services cannot be measured reliably would the fair
value of the equity instruments granted be used.
Illustrative Example: Warrants Issued for Services
Mine X Co. engages a broker to provide services relating to a public oering of units in Mine X Co.
Each unit comprises one common share and one warrant entitling the holder to purchase one com
mon share at a fixed price by a future date. The warrants are required to be settled by the delivery
of a fixed number of equity shares for a fixed price. No cash or net settlement options exist.
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As compensation for the broker’s services, Mine X Co. issues warrants to the broker. The fair value
of the broker’s services provided is $100,000.
This transaction with the broker is considered an equity-settled share-based payment transaction
because Mine X Co. receives services as consideration for its own equity instruments. These war
rants are considered equity-settled instruments and are accounted for under IFRS2.
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The following journal entries are recorded by Mine X Co. (excluding tax consequences, if any):
Initial recognition & measurement
Dr. Equity (Share Issuance Cost) $100,000
Cr. Equity (Warrant Reserve or Contributed Surplus) $100,000
This transaction with brokers is in relation to a share issuance. As a result, the services provided
relate to share issuance and share issuance expenses are included within equity.
Subsequent measurement
Under IFRS2, equity-settled instruments are not subsequently re-measured (i.e., subsequent
changes in fair value are not recognized).
Note: If warrants are accounted for in accordance with IFRS2 Share-based Payment, the company
determines if the warrants are i) an equity-settled award, or ii) a cash-settled award. As such, classifi
cation guidance under IAS32 is not relevant (see below for further discussion).
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Warrants Without Services Provided
As part of a financing arrangement, Canadian mining companies commonly issue shares and
warrants together as units to lenders or investors (e.g., in a public or private equity placement
or as part of a convertible debenture financing arrangement).
Warrants not issued in exchange for goods or services are generally within the scope of
IAS32 and IFRS9.
April 2018 Viewpoints: Applying IFRS® Standards in the Mining Industry | Accounting For Share Purchase Warrants Issued 3
To determine the appropriate accounting under IAS32 and IFRS9, a mining company must
carefully review the terms and conditions of the warrants to understand whether the warrants
have characteristics of:
• a derivative financial liability (“financial liability”) that is measured at fair value, with
changes in value recorded in profit or loss; or
• an equity instrument.
Although warrants are often settled by the issuance of equity shares, the warrants themselves
may not necessarily be classified as an equity instrument. Under IAS32, equity classification
applies to instruments where a fixed amount of cash (or liability), denominated in the issuer’s
functional currency, is exchanged for a fixed number of shares (often referred to as the “fixed
for fixed” criteria). Warrants issued by mining entities that fail to meet equity classification
often contain terms that breach the “fixed for fixed” criteria in IAS32.
The classification process is complex. However, some of the common features of warrants
observed in Canada that may result in financial liability classification include, but are not
limited to:
Feature Example
• warrants with an exercise price based on
the issuer’s market share price at the date
of exercise
• Company A issues warrants with an exer-
cise price dependent on Company A’s
market share price at the date of exercise.
• warrants where the number of shares
to be issued on exercise varies
• Company B issues warrants where the
number of shares to be issued is based
on the lowest five-day “Volume Weighted
Average Price” in the last 30 days prior to
exercise.
• warrants with an exercise price that is
in a currency that is dierent from the
functional currency of the issuer
• Company C has a U.S. dollar functional
currency and issues warrants that have an
exercise price denominated in Canadian
dollars.
• warrants with an exercise price that
changes based on a conversion ratio, and
are adjusted down to the lower price of
any later issue in the underlying shares
• Company D issues warrants with a feature
that adjusts the exercise price to provide
dilution protection for the warrant holder
in the event the Company issues shares at
a price lower than the current market price.
Similar dilution protection is not aorded
to the company’s common shareholders.
The above list is not exhaustive. Other terms and conditions of warrants may exist, that may
also result in financial liability classification. The analysis is very complex and involves profes
sional judgment.
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4 Although the issue and repayment amount in foreign currency may be fixed, when converted back to the entity’s functional
currency, it results in a variable amount of cash (that is, a variable carrying amount for the financial liability that arises from
changes in exchange rates), and hence fails the ‘fixed-for-fixed’ criteria for equity classification.
4 Viewpoints: Applying IFRS® Standards in the Mining Industry | Accounting For Share Purchase Warrants Issued April 2018
The classification of a warrant as an equity instrument or a financial liability can significantly
aect a company’s financial statements. For example, if a warrant is classified as a financial lia
bility, it is subsequently measured at fair value with changes in value recorded in profit or loss,
resulting in potential volatility within the financial statements (e.g., equity and profit or loss).
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Consideration received on the sale of a share and share purchase warrant classified as
equity is allocated, within equity, to their respective equity accounts on a reasonable basis.
Two commonly accepted allocation approaches are the residual method and the relative
fair value method.
5
The allocation of consideration received on the sale of a unit comprising a common share and
a share purchase warrant with the share purchase warrant classified as a financial liability can
be more complicated. Please refer to the IFRSDiscussion Group website for further discussion
on this topic and page 9 for a listing of some other relevant IFRSDiscussion Group topics.
Illustrative Example: Warrants Classified as Equity
To finance exploration activities, ABC Ltd. (the issuer), entered into a $1,000,000 private place
ment of units.
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Each unit comprises one common share and one share purchase warrant in ABC Ltd. Each share
purchase warrant has a fixed exercise price denominated in Canadian dollars and is convertible into
a fixed number of shares. ABC Ltd. has a Canadian dollar functional currency. The fair value for the
shares at the date of issue is $800,000.
The share purchase warrants are classified as equity instruments because a fixed amount of cash is
exchanged for a fixed amount of equity. In this example, no other features exist that would result in
financial liability classification.
Applying a residual approach, the following journal entries are recorded by ABC Ltd. (excluding tax
consequences, if any):
Initial recognition & measurement
Dr. Cash $1,000,000
Cr. Equity (Warrant Reserve or Contributed Surplus) $200,000
Cr. Equity (Share Capital) $800,000
Subsequent measurement
Warrants classified as equity instruments are not subsequently re-measured (i.e., subsequent
changes in fair value are not recognized).
5 Under the residual method, one component is measured first and the residual amount is allocated to the remaining component.
In contrast, under the relative fair value method the total proceeds of the instrument is allocated to the components in propor
tion to their relative fair values.
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April 2018 Viewpoints: Applying IFRS® Standards in the Mining Industry | Accounting For Share Purchase Warrants Issued 5
Illustrative Example: Warrants Classified as Financial Liabilities
To finance exploration activities, XYZ Ltd. entered into a $1,000,000 private placement of units.
Each unit is comprised of one common share and one share purchase warrant in XYZ Ltd. Each
share purchase warrant has a fixed exercise price denominated in U.S. dollars and is convertible
into a fixed number of shares. XYZ Ltd. has a Canadian dollar functional currency. At the date of
issue, the share purchase warrants have a fair value of $400,000 Canadian dollars.
The share purchase warrants are classified as a financial liability. Although the conversion amount
in foreign currency may be fixed, when converted back to XYZ Ltd.’s Canadian functional currency,
it results in a variable amount of Canadian dollar denominated cash (that is, a variable carrying
amount for the financial liability that arises from changes in exchange rates), and hence the instru
ment fails the “fixed for fixed” criteria for equity classification.
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The following journal entries are recorded by XYZ Ltd. (excluding tax consequences, if any):
Initial recognition & measurement:
Dr. Cash $1,000,000
Cr. Financial Liability $400,000
Cr. Equity (Share Capital) $600,000
Subsequent measurement (assuming an increase in value of warrants)
Dr. Expense - Fair Value Movement $XXX
Cr. Financial Liability $XXX
Measurement of Warrants
The measurement or valuation of a warrant, which is analogous to a call option issued by a
company, is frequently calculated using an option pricing model. A commonly used model is
the Black-Scholes model.
Mining companies, however, should exercise caution in automatically assuming that the Black-
Scholes model is always appropriate and is the only valuation method that can be applied.
For example, where a breach of the “fixed for fixed” requirement exists (as discussed above)
and the warrants are classified as a financial liability, the use of dierent valuation models,
possibly more complex in nature, may be appropriate.
A common issue highlighted by users of the Black-Scholes model relates to the model’s
underlying assumption that warrants can only be exercised at expiration, which may not
always be the case with certain warrants. In addition, a key input into the Black-Scholes
model is the implied volatility of the company’s shares. For some junior mining companies,
basing the expected volatility on actual historical volatility may result in an unexpected
(e.g., high) valuation. For example, some junior mining entities may have low trading vol
umes. These companies may be more susceptible to a wide range of trading prices which
in turn may create a high historical volatility number, contributing to a high warrant valua
tion (assuming all other factors remain constant).
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6 Viewpoints: Applying IFRS® Standards in the Mining Industry | Accounting For Share Purchase Warrants Issued April 2018
Another valuation issue occurs when the valuation of the total unit, or in some cases simply
the warrants, is greater than the transaction value. In these situations entities need to consider
the restrictions on the recognition of day one gains or losses set out in IFRS9 and IFRS13 Fair
Value Measurement.
6
Modification of Warrants
Subsequent to the initial recognition of warrants, there may be instances where the original
terms of the warrants are amended prior to, or near, maturity. For example, the amendment
may take the form of an extension of the expiry date, a change in the exercise price or a
combination of both.
7
The accounting for a subsequent modification of the terms of the warrants depends on the
initial classification of the warrants.
Assuming there is no evidence of any services being received on the subsequent re-pricing
of the warrants the following accounting guidance should be applied:
Initial Classification of Warrants Guidance
IFRS2
Within
the scope
of IFRS2
Equity Settled • Apply IFRS2 guidance on modifications to equity
settled share-based payment arrangements.
• Recognize an expense for any increase in the fair
value of the equity instruments granted measured
immediately before and after the modification.
• Any decrease in value is not taken into account.
Liability Settled • Re-measure the fair value of the liability at the end
of each reporting period, with any changes in fair
value recognized in profit or loss for the period.
IAS32
and IFRS9
Within
the scope
of IAS32
and IFRS9
Equity
Presentation
• The modification could be viewed as the cancella
tion of the old warrants followed by the issuance of
new warrants. Subject to a company’s accounting
policy, a re-measurement adjustment, as a result of
the amendments, may or may not be recognized
within equity.
-
• Note a change within equity may also result in an
earnings per share adjustment.
Liability
Presentation
• Re-measure the financial liability based on the
new terms of the warrants with any gain or loss
recorded in the profit or loss.
6 Refer IFRS9.5.1.1A, IFRS9.B5.1.2A, IFRS13.57-60 and IFRS13.BC132-138.
7 Often, an extension in the term and/or change in exercise price are made as a result of a decline in the entity’s quoted share
price below the warrant exercise price, which results in the exercise of the warrants being uneconomic to the holder. As a con
sequence of the modification, the fair value of the warrants will typically increase in comparison with the fair value immediately
prior to the modification. The alternative to modification would be to allow the warrants to lapse, with the entity then attempt
ing to raise new capital from investors.
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April 2018 Viewpoints: Applying IFRS® Standards in the Mining Industry | Accounting For Share Purchase Warrants Issued 7
Exercise of Warrants
If a warrant holder exercises the option to convert the warrants into common shares of a
company, the accounting for the exercise will depend on the classification of the warrant:
Initial Classification of Warrants Guidance
Equity Presentation • Amounts for warrants classified as equity instruments
are transferred to another account within equity at the
date the warrants are exercised.
Liability Presentation • Amounts for warrants classified as a financial liability
are revalued immediately prior to settlement. Any
change in fair value is recognized in profit or loss.
Expiry of Warrants
When shares prices are low, many warrants may expire unexercised. The accounting for unex-
ercised warrants will depend on the initial classification of the warrant:
Initial Classification of Warrants Guidance
Equity Presentation • Amounts for warrants classified as equity instruments
are generally transferred to another account within
equity (e.g., Contributed Surplus) at the date the war
rants expire.
-
Liability Presentation • Amounts for warrants classified as a financial liability
are revalued immediately prior to expiry and derecog
nized. Any change in fair value is recognized in profit
or loss.
-
The expiration of warrants, however, may have tax consequences. A discussion of such tax
consequences is outside the scope of this Viewpoint, but readers are encouraged to consult
with their professional tax advisor.
8 Viewpoints: Applying IFRS® Standards in the Mining Industry | Accounting For Share Purchase Warrants Issued April 2018
Other Sources of Information
To learn more about accounting for share purchase warrants, mining companies may want
to refer to the following IFRSDiscussion Group reports, published on the Financial Reporting
and Assurance Standards Canada website:
• Flow-through shares with Attached Share Purchase Warrants—September 11, 2014
The report considers the measurement of the various components of a flow-through
share with an attached share purchase warrant classified as equity.
• IAS39: Measurement of a Unit Comprised of Common Shares and Warrants—Septem
ber5, 2013
The report considers the measurement of a unit comprised of common shares and
warrants.
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• Modification of Share Purchase Warrants—July 19, 2012
The report considers the accounting treatment for a modification to the terms of warrants
issued for proceeds including any eect on earnings per share.
• Recognition of Share Purchase Warrants—January 12, 2012
The report considers which standard applies when warrants are issued to brokers or
underwriters as consideration for the services provided in conjunction with an issuance
of warrants or other securities.
Accounting for warrants can be complex and requires the exercise of judgment in arriving
at an appropriate conclusion. Mining companies should consider consulting their professional
accounting advisors and auditors when undertaking such analysis.
April 2018 Viewpoints: Applying IFRS® Standards in the Mining Industry | Accounting For Share Purchase Warrants Issued 9
The Mining Industry
Task Force on IFRS
Members
Ronald P. Gagel, CPA, CA (Chair)
Prospectors & Developers Association
of Canada
Toronto, Ontario
Bryndon L. Kydd, CPA, CA
BDO Canada LLP
Vancouver, British Columbia
Stéphanie Laframboise, CPA, CA
Raymond Chabot Grant Thornton LLP
Montreal, Quebec
Blake Langill, CPA, CA
Ernst & Young LLP
Toronto, Ontario
James Lusby, CPA, CA
PricewaterhouseCoopers LLP
Toronto, Ontario
Andy Marshall, CA (UK), CFA
First Mining Finance Corp.
Vancouver, British Columbia
Keith McKay, CPA, CA
Dalradian Resources Inc.
Toronto, Ontario
Ken McKay, CPA, CA
KPMG LLP
Toronto, Ontario
Maruf Raza, CPA, CA
MNP LLP
Toronto, Ontario
Julie Robertson, CPA, CA
Barrick Gold Corporation
Toronto, Ontario
Cameron Walls, CPA, CA
Deloitte LLP
Vancouver, British Columbia
Blair Zaritsky, CPA, CA
Osisko Mining Inc.
Toronto, Ontario
Sta
Michael Massoud, CPA, CA,
CPA (Illinois)
CPA Canada
Toronto, Ontario
Comments on this Viewpoints or suggestions for future Viewpoints should be emailed
to ifrsviewpoints@cpacanada.ca.
For more information on IFRS visit www.cpacanada.ca/viewpointsmining.
April 2018 Viewpoints: Applying IFRS® Standards in the Mining Industry | Accounting For Share Purchase Warrants Issued 10