There is a clause where the stock option exercise price is subject to adjustment in the event the Company subsequently issues shares below the exercise price. How would you account for this feature?
Exercise price adjustment
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This clause is considered a down-round feature. The down round feature in itself does not cause the instrument to be accounted for as a liability. The stock options are indexed to and settled in the company’s stock, and as such, should be accounted for as equity. There is no embedded feature that requires bifurcation and derivative accounting. Since the options are equity-classified, the company does not need to account for changes in fair value attributable to the down round feature through the income statement. If triggered, the effect of the down round feature should be reflected in EPS.