In the 1990 discussion memorandum Distinguishing between Liability and Equity Instruments and Accounting for Instruments with Characteristics

Question:

In the 1990 discussion memorandum “Distinguishing between Liability and Equity Instruments and Accounting for Instruments with Characteristics of Both,” the FASB presented arguments relating to the presentation and measurement of a company’s stock options and warrants. Under current GAAP, stock options and warrants are measured at the historical fair value of consideration received at issuance. The amount received is reported as an element of stockholders’ equity.

Some theorists argue that stock options and warrants represent obligations of the issuing entity and should be reported as liabilities. Moreover, a more appropriate measure would be fair value of the options or warrants at the balance sheet date.

Team 1: Argue for the current GAAP treatment for the issuance and subsequent reporting of stock options and warrants.

Team 2: Argue for reporting stock options and warrants as liabilities measured at current fair value.

GAAP
Generally Accepted Accounting Principles (GAAP) is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC). While the SEC previously stated that it intends to move from U.S. GAAP to the International Financial Reporting Standards (IFRS), the... Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...