Note
BGL does not provide accounting or taxation advice. The following is designed to act as a guide for Simple Fund 360 users. It is not designed to be accounting or tax advice and should not be taken as a strict guideline. Other methods that are more suitable may be used instead of these steps.
Overview
Warrants can be accounted for at year-end in two methods, the market value method and the asset/liability method. There will be a variance in the value obtained by the two methods; however, this is generally an immaterial variance. Where the variance is material, the market value should be used.
The market value method is to value the warrant at the closing trading price for the year-end. The change in net market value is the movement in the acquisition cost/prior year value and the market value at year-end.
With the asset liability method, the asset is valued at the current market value of the underlying asset. The liability is then determined for the amount of the outstanding loan and any accrued interest and borrowing costs. In this case, the change in net market value is the movement in the net value of the asset for the period. This method is used where the accounting package is the tool for the preparation of the tax return as well as the accounts.
The tax return requires the use of the asset and liability method for tax reporting methods purposes. As a result, the ATO has sent a number of ‘request for information’ letters to superannuation funds with borrowings and interest paid to be included in the return. The ATO has indicated it will follow the approach adopted by the Australian Prudential Regulation Authority (APRA) when reviewing these investments in SMSFs.
Refer to the Institute of Chartered Accountants Australia Report - Superannuation Funds and Warrants for more information.
How do I account for the residual payment of a warrant instalment and how to change the code to a fully paid share?
- Dr Liability/ Loan Account
Cr Bank Account - If the ASX or Investment code you used for the Warrant has not changed or you want to move Asset Categories then use the Share Code/Class Change (Manual) function.
Asset/Liability Method
Note
BGL does not provide accounting or taxation advice. The following is designed to act as a guide for Simple Fund 360 users. It is not designed to be accounting or tax advice and should not be taken as a strict guideline. Other methods that are more suitable may be used instead of these steps.
Account Suggestions:
Account 72300/INVESTCODE can be used to record the warrant purchase.
Account 66000 can be used to record the prepaid Interest.
Account 66000 can be used to record the prepaid borrowing expenses.
Account 85500 Limited Recourse Borrowing Arrangements can be used to record the loan (this is a linked account to 72300).
Account 42010 can be used to record the Interest Expense.
It is suggested to add a new account for the Borrowing Expense. See Other Accounts for more information.
Purchase
Dr Investment (number of warrants x underlying exercise price)
Dr Prepaid Interest (Asset A/C)
Dr Prepaid Borrowing Expense (Asset A/C)
Cr Loan Account (Liability A/C)
Cr Cash At Bank (amount paid for warrants)
(Recognition of purchase)
Revaluation
Dr Interest Expense (Expense A/C)
Dr Borrowing Expense (Expense A/C)
Cr Deductible Prepaid Interest (Asset A/C)
Cr Deductible Borrowing Expense (Asset A/C)
(Recognition of tax deduction for expenses at year-end)
Closing out the position
Dr Loan Account
Cr Cash At Bank
(Exercising the warrant)
Dr Cash At Bank
Dr Loan Account
Cr Prepaid Interest (not claimed)
Cr Borrowing Expense (not claimed)
Cr Investment (number of warrants x underlying exercise price)
(Sale of warrant to issuer or on secondary market)
Market Value Method
Note
BGL does not provide accounting or taxation advice. The following is designed to act as a guide for Simple Fund 360 users. It is not designed to be accounting or tax advice and should not be taken as a strict guideline. Other methods that are more suitable may be used instead of these steps.
Account Suggestions:
Account 72300/INVESTCODE can be used to record the warrant purchase.
Account 66000 can be used to record the prepaid Interest.
Account 66000 can be used to record the prepaid borrowing expenses.
Account 85500 Limited Recourse Borrowing Arrangements can be used to record the loan (this is a linked account to 72300).
Account 42010 can be used to record the Interest Expense.
Account 23900 can be used to record the dividend.
It is suggested to add a new account for the Borrowing Expense. See Other Accounts for more information.
Purchase
Dr Investment - warrants (No of Warrants * price)
Cr Cash
(Recognition of purchase)
Revaluation
Dr Investment - warrants (No of Warrants * (closing price - opening price)
Cr Change in Net Market Value
(Recognition of increase in market value at year end)
Dr Change in Net Market Value
Cr Investment - warrants(No of Warrants * (closing price - opening price)
(Recognition of decrease in market value at year end)
Note: This process is automated during the create entries process, so there is no need to manually enter these transactions.
Additional capital
Dr Investment - warrants (Record as a Cost Base Adjustment)
Cr Income - dividend
(Recognition of dividend used to reduce the liability at exercise date)
Closing out the position
Dr Investment – warrants (Share)
Cr Cash
Cr Investment – warrants (No of Warrants * exercise price)
(Exercising the warrant)
Dr Cash
Cr Investment – warrants (No of Warrants * current price)
(Sale of warrant to issuer or on secondary market)