Initial Public Offer (IPO) costs involve a combination of share issue costs and listing expenses. Share issue costs are debited to equity whereas listing expenses are charged to the P&L. Therefore, it becomes important to allocate the total costs incurred in an IPO to share issue costs and other than share issue costs, i.e., listing expenses.
‘An entity typically incurs various costs in issuing or acquiring its own equity instruments. Those costs might include registration and other regulatory fees, amounts paid to legal, accounting, and other professional advisers, printing costs and stamp duties. The transaction costs of an equity transaction are accounted for as a deduction from equity to the extent they are incremental costs directly attributable to the equity transaction that otherwise would have been avoided. The costs of an equity transaction that is abandoned are recognised as an expense’. [Ind AS 32.37].
An entity issues new equity shares and may simultaneously list them. In such a case, a portion (e.g., accountants’ fees relating to prospectus), or the entire amount of certain costs (e.g., cost of handling share applications) should be recognised in equity.
The Table below provides a basis of allocation:
|
Type
of cost
|
Allocation
(share-issue,
listing or both?)
|
|
Stamp duties for shares, fees for legal and tax advice related
to share issue
|
Share issue
|
|
Underwriting fees
|
Share issue
|
|
Listing fees paid to stock exchange / regulator
|
Listing
|
|
Accountants’ fees relating to
prospectus
|
Both – in practice IPO documents
typically relate both to the share offer and the listing
|
|
Valuation fees in respect of valuation of shares
|
Share issue
|
|
Valuation fees in respect of
valuation of assets other than shares (e.g., property) if the valuation is
required to be disclosed in the prospectus
|
Both, because IPO documents typically
relate to both the share offer and the listing. However, if the valuation is
not required to be disclosed in the prospectus, such costs are not directly
attributable to the IPO and should be expensed
|
|
Tax and legal entity restructuring costs in anticipation of the
IPO
|
P&L Expense. Corporate restructurings are undertaken as a
housekeeping matter to facilitate the listing process and are not directly
attributable to the issue of new shares
|
|
Legal fees other than those relating
to restructuring in IPO above
|
Both – legal advice is typically
required both for the offer of shares to the public and for the listing
procedures to comply with the requirements established by the relevant
securities regulator / exchange. However, some legal fees may relate
specifically to share issue or to listing
|
|
Prospectus design and printing costs
|
Both – although in cases where most prospectus copies are sent
to potential new shareholders, the
majority of such costs might relate to the share issue
|
|
Sponsor’s fees
|
Both – to the extent the sponsor’s
activities relate to identifying potential new shareholders and persuading
them to invest, the cost relates to the share issue. The activities of the
sponsor related to compliance with the relevant stock exchange requirements
should be expensed in P&L
|
|
‘Roadshow’ and advertising costs
|
Although the ‘roadshow’ might help to sell
the offer to potential investors and hence contributes to raising equity, it
is usually also a general promotional activity. Therefore, the same needs to
be allocated between share issue costs and listing expenses
|
|
Merchant Bankers / Manager’s costs
|
Both – they need to be allocated on a
rational basis between share issue costs and listing expenses
|
|
Costs of general advertising aimed at enhancing the entity’s
brand; and fees paid to the public relations firm for enhancing the image and
branding of the entity as a whole
|
These are not related to issuance of equity shares and should be
charged to P&L
|
‘Transaction costs that relate to the issue of a compound financial instrument are allocated to the liability and equity components of the instrument in proportion to the allocation of proceeds. Transaction costs that relate jointly to more than one transaction (for example, costs of a concurrent offering of some shares and a stock exchange listing of other shares) are allocated to those transactions using a basis of allocation that is rational and consistent with similar transactions.’ [Ind AS 32.38]. Another basis may also be appropriate if those can be justified in the given situation. Cost of listing existing shares will be charged to P&L. Cost of issuing new shares will have to be allocated to listing expenses (charged to P&L) and share issue costs (charged to equity).
An allocation between listing and issue of shares should not result in the costs attributed to either of the two components being greater than the costs that would be incurred if either were a stand-alone transaction. Significant judgement may be involved in determining the allocation. The IFRS Interpretations Committee (IAS 32 Transaction Costs to be Deducted from Equity, September, 2008) discussed this issue and noted that judgement may be required to determine which costs relate solely to activities other than equity transactions – e.g., listing existing shares – and which costs relate jointly to equity transactions and other activities. The IFRIC decided not to add this issue to its agenda.
An IPO may involve selling the shares of existing investors, such as in an Offer for Sales (OFS). All or a portion of allocated costs may be reimbursed by the existing investors, irrespective of whether the IPO is successful or not. For example, if INR 100 is incurred with respect to OFS shares and INR 60 is reimbursed, the entity will charge INR 40 to the P&L, this being in
the nature of listing shares that are already issued. When shares are listed without any additional issue of share capital (i.e., a placing of existing shares), no equity transaction has occurred and, consequently, all expenses should be recognised in profit or loss as incurred.
Example – Accounting for IPO costs
List Co is seeking a listing on the stock exchange; 1/3rd of the shares is fresh issuance, the other 1/3rd is the sale of shares of existing investor under OFS, and the remaining 1/3rd relates to already existing shares of the promoter that will survive the listing of the entity.
List Co incurs a total expenditure of INR 99 and receives reimbursement of INR 20 from OFS investors. Of the INR 99, the total listing cost (on the basis of allocation) is INR 60. The Table below presents the allocation of the cost and the amounts to be charged to share issue costs in equity and the amount to be charged to P&L, being in the nature of listing expenses:
|
|
New
shares
INR
|
Existing
shares
INR
|
New
shares
INR
|
|
Total cost allocated @ 1/3rd each
|
33
|
33
|
33
|
|
Reimbursement from OFS investors
|
–
|
–
|
(20)
|
|
Listing expenses charged to P&L
|
20
(1/3rd share of
INR 60)
|
33
|
33
|
|
Share issue costs charged to equity
|
13
|
–
|
–
|
Based on the above, the total cost incurred by List Co is INR 99, of which INR 20 is reimbursed by the OFS investor. Therefore, List Co incurs a net cost of INR 79. Of the INR 79, only INR 13 relates to share issuance and is debited to equity, and the remaining INR 66 relates to listing and should be charged to P&L. INR 66 can also be determined by aggregating the amounts in the 2nd last row.
Costs that are related directly to a probable future equity transaction should be recognised as a prepayment (asset) in the statement of financial position. The costs should be transferred to equity when the equity transaction is recognised or recognised in profit or loss if the issue or buy-back is no longer expected to be completed.
Sometimes, merchant bankers are paid contingent fees linked to a successful IPO. These costs need to be provided for as the services are received if the IPO event is probable and outflow of resources is expected.
It may also be noted that in the cash flow statement the costs should be included as follows:
(i) costs which have been expensed – in operating cash flows,
(ii) costs deducted from equity – in financing cash flows.
At a particular reporting date, the IPO may be in progress. To the extent the costs incurred are identified as listing expenses, the same should be charged to P&L. To the extent the costs are identified as share issue costs, the same may be parked in an advance account if the IPO is probable. Once the IPO occurs and shares are issued, the advance amount should be debited to equity. If the IPO is not probable, or was probable but is no longer probable, then the entire expenses should be charged to P&L.
