Accounting for Cost of Public Offerings

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PHILIPPINE INTERPRETATIONS COMMITTEE (PIC)QUESTIONS AND ANSWERS (Q&As)

Q&A No. 2011 - 04

PAS 32.37-38 Costs of Public Offering of Shares

Issue

How should the costs of a Public Offering (PO) that involves issuing new shares and alisting with the stock exchange be accounted for? 1

Background

An entity often lists its existing shares and simultaneously issues new shares. As part ofthe listing and offering process, the entity incurs various costs (e.g., certain legal fees,listing sponsor fees, or accounting fees) that are incremental costs and jointly relate tothe listing of existing shares and issue of new shares.

Paragraph 37 of PAS 32, Financial Instruments: Presentation, requires that transactioncosts2 that are directly attributable to issuing new shares be deducted from equity, net ofany related income tax benefit. Costs that relate to the stock market listing, or otherwiseare not incremental costs directly attributable to issuing new shares, should be recordedas an expense in the income statement.

PAS 32.38 further requires transaction costs

that relate jointly to more than onetransaction (for example, costs of a concurrent offering of some shares and a stockexchange listing of other shares) to be allocated to those transactions using a basis ofallocation that is rational and consistent with similar transactions. However, PAS 32provides no further guidance as to what basis of allocation is rational and consistent withthe joint transactions.

Consensus:

The requirement in PAS 32.37 clearly relates to equity transactions, such as issuing orbuying back of own shares. The costs of listing shares are not considered as costs of anequity transaction since no equity instrument has been issued and, hence, such costs

are recognized as an expense in profit or loss when incurred.

1This Q&A does not deal with the listing of existing shares, which include treasury shares and secondary

shares. Refer to PAS 32.33 for the accounting provisions on treasury shares.

2Transaction costs are incrementalcosts that are directly attributable to the acquisition, issue or disposal

of a financial asset or financial liability. (Ref.: PAS 39.9 and PFRS 9, Financial Instruments, which is

effective on January 1, 2015)


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The offering and listing of shares are usually done simultaneously. Incremental coststhat relate jointly to more than one transaction are allocated to those transactionsaccording to the facts and circumstances using a basis that is rational and consistentwith similar transactions.

PAS 32.38 clearly states that transaction costs that relate jointly to more than one

transaction (for example, costs of a concurrent offering of some shares and a stockexchange listing of other shares) are allocated to those transactions using a basis ofallocation that is rational and consistent with similar transactions. No one method isprescribed in PAS 32; hence, determining whether what basis of allocation is morerational and consistent to the joint transactions requires the exercise of judgment.

The most appropriate basis of allocation is one based on the proportion of the number ofnew shares sold compared to the total number of outstanding shares immediately afterthe new share issuance.

An assessment of the application of any method other than on the proportion of newlysold shares to total number of shares outstanding immediately after the new share

issuance must be made, given the subjectivity that can surround such facts andcircumstances. Examples of such different allocations are:

1. An allocation based on the proportion of the number of newly issued sharescompared to the total number of shares sold through the offering (i.e., including theshares of existing shareholders who are selling shares as part of the offering). Thisapproach may be appropriate if there is/are a shareholder(s) using the listing as anexit strategy and the remaining existing shareholders have not encouraged the entityto list for their benefit and there is evidence to support that the remainingshareholders do not intend to sell shares in the foreseeable future.

2. An allocation entirely to the new shares sold. This approach may be appropriate if

no existing shareholders are selling shares as part of the offering. Further, existinginvestors have not encouraged the entity to list for their own benefit (i.e., the purposeof the listing is only to raise new capital) and there is evidence to support that theexisting shareholders do not intend to sell shares in the foreseeable future.


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The following table provides a general indication as to some of the costs incurred in aPO that involves issuance of new shares and concurrent listing of existing shares, andthe basis on which the costs might be allocated. The list is not exhaustive as the stockexchange and the Securities and Exchange Commission (SEC) may prescribe additionalfees necessary to the joint transactions.

Type of Cost Share Issuance/ Listing General Treatment

Taxes:

Documentary stamp tax Share issuance Deduction to equityOther percentage tax Share issuance as the PO

tax on primary offering3 isimposed and shall be paid bythe issuing corporation

Deduction to equity

Professional fees on:

Underwriting Share issuance Deduction to equity

Audit and otherprofessional advicerelating to prospectus

Joint as it is typicallyrequired both for the offer ofshares to the public and forlisting procedures to complywith requirements establishedby SEC and the stockexchange

For allocation to equityand expense

Opinion of Counsel Joint as it is typicallyrequired both for the offer ofshares to the public and forlisting procedures to complywith requirements establishedby SEC and the stock

exchange


Tax Opinion Joint as it is typicallyrequired both for the offer ofshares to the public and forlisting procedures to complywith requirements establishedby SEC and the stockexchange


Fairness Opinion andValuation Report

Joint as it is typicallyrequired both for the offer ofshares to the public and forlisting procedures to comply

with requirements establishedby SEC and the stockexchange


3Primary offering refers to the original sale made to the investing public by the issuer corporation of its

unissued shares of stock. (Ref.: RR 6-2008)


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Type of Cost Share Issuance/ Listing General Treatment

Other costs:

Prospectus design andprinting

Joint although in caseswhere most prospectuscopies are sent to potentialnew shareholders, themajority of such costs mightrelate to share issuance


Road show presentation Listing although it may helpto sell the offer to potentialinvestors and hencecontributes to raising equity, itis usually a generalpromotional activity

Profit or loss item

Public relationsconsultants fees

Listing these costsgenerally relate to overallcompany promotion and arenot, therefore, incremental tothe share issuance

Profit or loss item

Newspaper publicationfees

Share issuance if theadvertising relates directly tothe share issue and is notgeneral advertising aimed atenhancing the entitys brand

Deduction to equity

SEC registration fees fornew shares

Share issuance Deduction to equity

Stock exchange listingfees

Listing Profit or loss item

Example

Go-public Company undertakes an IPO for the listing and issuance of 700,000 newshares and 300,000 existing shares. In relation to this, the company incurred thefollowing costs:

a. Documentary stamp tax P 25,000b. Fairness opinion and valuation report 125,000c. Tax opinion 75,000d. Newspaper publication 200,000e. Listing fee 300,000f. Other joint costs 275,000

P 1,000,000

Go-public will recognize the listing fee of P300,000 immediately to profit or loss.


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The documentary stamp tax and newspaper publication fee amounting to P25,000 andP200,000, respectively, will be recognized as a deduction to equity.

a. Issue price of shares at above par value

Share premium 225,000Cash/ Creditor 225,000

b. Issue price of shares at par value

Share Issuance Costs 225,000Cash/ Creditor 225,000

The share issuance costs will be treated as a contra shareholders equityaccount as a deduction to the following in the order of priority:

1. Share Premium from previous share issuance; or2. Retained Earnings with appropriate disclosure.

Joint costs, which include fee for fairness opinion and valuation report, tax opinion costand other joint costs, amounting to P475,000 will be allocated using the proportion ofnewly sold shares to the total number of shares outstanding immediately after the newshare issuance.

Costs to be recognized as deduction to equity:

P475,000 x 700,000/1,000,000 = P332,500

Observe that 700,000 is used for the allocation as this relates to the new sharesissued considered as equity transaction. 1,000,000 shares were listed and

issued but only 700,000 shares have been added to the number of sharesoutstanding after the listing and issuance of shares. This means that the300,000 shares listed and issued pertain to those that were issued by existingshareholders, thus, not resulting to the issuance of new shares on the part of

ABC Company.

Costs to be recognized immediately in profit or loss:

P475,000 x 300,000/1,000,000 = P142,500


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Effective Date

The consensus in this Q&A is effective for annual financial statements beginning on orafter January 1, 2012. Earlier application is encouraged.

* * * * *

Q&A approved by PIC: September 21, 2011 (Original signed)

PIC Members

Dalisay B. Duque, Chairman

Wilfredo A. Baltazar Judith V. Lopez

Rosario S. Bernaldo Ma. Concepcion Y. Lupisan

Sharon G. Dayoan Rufo R. Mendoza

Ma. Gracia F. Casals-Diaz Ruby R. Seballe

Edmund Go Wilson P. Tan

Lyn I. Javier/Reynold E. Afable Normita L. Villaruz

Q&A approved by FRSC: January 25, 2012

Accounting for Cost of Public Offerings

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