Introduction
When Berkshire Hathaway bought $10 billion of Occidental Petroleum preferred stock in 2019, it also received a warrant to buy Occidental common shares. At the end of 2025, that warrant could be exercised for 83.9 million shares at $59.59 each. A year after the Anadarko deal, Occidental also distributed warrants to all its common shareholders, with a $22 strike price and an expiry in August 2027; 30.4 million were still outstanding at the end of 2025. Both sets of warrants now sit in Occidental's equity, and neither moves its income statement, however far its share price swings.
That is the normal case. But a warrant with slightly different terms can be a liability, marked to fair value every quarter, with the changes running through earnings. The difference became front-page news in 2021, when a large number of special purpose acquisition companies (SPACs) had to restate their financial statements over it.
Equity or Liability
Accounting Standards Codification (ASC) 815-40 decides the classification of warrants and similar contracts on a company's own shares with two sets of tests, as Deloitte's roadmap on contracts on an entity's own equity sets out. First, the warrant must be indexed to the company's own stock: broadly, its settlement amount can depend only on the inputs to a fixed-for-fixed contract, a fixed number of shares for a fixed price, apart from standard adjustments such as stock splits. Second, the company must be able to settle it in shares in all circumstances: for example, it must have enough authorized but unissued shares, and no event outside its control may force a cash settlement unless the holders of the underlying shares would receive cash too.
Occidental's Berkshire warrant failed that second test when it was issued in 2019: until certain shareholder and regulatory approvals to issue the underlying shares were obtained, Berkshire could have required net cash settlement. Occidental carried it as a liability, at $188 million at issuance and remeasured through earnings each quarter, until the last approvals came at its May 29, 2020 annual meeting and the $103 million fair value was reclassified into equity.
- Fixed-for-fixed
The condition, under ASC 815-40, that a contract on a company's own equity exchanges a fixed number of shares for a fixed amount of cash or other consideration. A warrant whose share count or strike can vary with other inputs fails it, unless those inputs are ones that would affect the fair value of a fixed-for-fixed contract.
A warrant that passes both tests is equity. Its share of the proceeds received is recorded in additional paid-in capital at issuance and never remeasured; on exercise, the cash received adds to equity and the shares are issued. A warrant that fails either test is a liability, carried at fair value, with every change in value recognized in earnings:
| Line item | Share price rises | Share price falls |
|---|---|---|
| Warrant liability at issuance, at fair value | 100 | 100 |
| Warrant liability at year-end, at fair value | 150 | 70 |
| Loss or (gain) recognized in earnings | 50 | (30) |
The change in fair value is non-cash. The same warrant classified in equity would stay at 100 in additional paid-in capital, with no effect on earnings.
The result is counterintuitive: when the company's shares rise, the warrants become more valuable to their holders and the company records a loss; when they fall, it records a gain.
Warrants Issued Alongside Debt or Preferred
Warrants are often attached to another security, as Berkshire's was to its preferred stock. The proceeds are then allocated between the two instruments, usually in proportion to their relative fair values when the warrants are equity-classified, or with the warrants taken first at full fair value when they are liabilities. Either way, the host security is recorded below its face amount, and for debt the resulting discount is amortized into interest expense, as described in debt issuance costs and original issue discount. The warrant therefore raises the reported cost of the borrowing even though it never requires cash interest.
The SPAC Warrant Restatements
SPACs typically issued warrants alongside their shares, and for years most classified them as equity. On April 12, 2021, the Securities and Exchange Commission (SEC) staff issued a statement on the accounting for SPAC warrants. Two common provisions caused problems. In many private placement warrants, settlement terms changed depending on who held the warrant, which the staff viewed as failing the indexation test. And some warrants entitled every holder to cash in a tender offer accepted by holders of more than half the shares, an event the company might not control in which only some shareholders would receive cash.
Many SPACs, and companies that had merged with them, reclassified their warrants as liabilities and restated earlier financial statements. From then on, their earnings swung with the value of the warrants, often by more than their operating results, in the direction opposite to their share prices.
That question is answered in diluted earnings per share and in valuation by the treasury stock method: the company is assumed to use the exercise proceeds of in-the-money warrants to buy back shares at the market price, and only the net additional shares are counted. A warrant whose strike sits above the share price adds nothing, which is why Occidental's 2025 diluted share count left out 84.2 million warrants and options, primarily the Berkshire warrant at $59.59, while its $22 warrants were in the money. The method is explained in earnings per share: basic vs diluted, and the preferred stock that came with Berkshire's warrant is covered in preferred stock: liability, mezzanine or equity.
