Cancellation of Equity shares warrants

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Kailash Agarwal (Querist)
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21 May 2009 Some equity shares warrants to be converted into equity but could not converted so cancellation of these warrants would be treated as capital transaction or revenue transaction and applicability of AS 5

CA CS CIMA Prakash Somani

CA CS CIMA Prakash Somani (Expert)
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21 May 2009 Are you asking from coms point of view??

Asha Kanta Sharma online

Asha Kanta Sharma

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18 July 2024 The cancellation of equity share warrants would generally be treated as a capital transaction rather than a revenue transaction. Here’s a detailed explanation:

### Treatment as Capital Transaction

1. **Nature of Equity Share Warrants**: Equity share warrants are typically issued by a company to allow the holder to purchase shares at a predetermined price in the future. When warrants are cancelled, it typically means that the right to convert them into shares is forfeited or abandoned.

2. **Accounting Treatment**:
- **AS 5 (Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies)**: This accounting standard primarily deals with accounting for extraordinary items, prior period adjustments, and changes in accounting policies. The cancellation of warrants does not usually fall under the scope of AS 5 unless it specifically impacts the calculation of net profit or loss for the period in a significant manner.

- **Capital Transaction**: Cancellation of warrants is considered a capital transaction because it affects the capital structure of the company. The warrants are originally issued as part of the company's equity structure and their cancellation adjusts the company's equity capital.

3. **Impact on Financial Statements**:
- **Balance Sheet**: The warrants would typically be presented as part of the equity section under the shareholders' funds. Upon cancellation, any related consideration received (if applicable) would adjust the equity reserves or capital.

- **Income Statement**: There would generally be no impact on the income statement unless the cancellation results in a significant financial gain or loss, which is rare.

### Applicability of AS 5

AS 5 primarily deals with specific accounting treatments for extraordinary items, prior period adjustments, and changes in accounting policies. Since the cancellation of warrants does not fall within these categories unless it meets the criteria for being an extraordinary item (which is rare), AS 5 is usually not directly applicable to such transactions.

### Conclusion

To summarize, the cancellation of equity share warrants would typically be treated as a capital transaction. It involves adjusting the company's equity structure and does not usually fall under the scope of AS 5 unless it results in a significant impact on the financial statements' presentation or net profit/loss calculation for the period. For precise accounting treatment, it is advisable to consult with a qualified accountant or financial advisor familiar with your specific circumstances and applicable accounting standards.

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