Accounting Research Tool
On the Radar

Contracts on an Entity's Own Equity

March 2022
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On the Radar
Contracts on an Entityʼs Own Equity

Entities raising capital must apply the highly complex, rules-based guidance in U.S. GAAP to determine whether (1) freestanding contracts such as warrants, options, and forwards to sell equity shares are classified as liabilities or equity instruments and (2) convertible instruments contain embedded equity features that require separate accounting as derivative liabilities. To reach the proper accounting conclusion, they must consider the following key questions: