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 a
listing with the stock exchange be accounted for? 1
Background
An entity often lists its existing shares and simultaneously issues new shares. As part of
the 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 to
the listing of existing shares and issue of new shares.
Paragraph 37 of PAS 32, Financial Instruments: Presentation, requires that transaction
costs2 that are directly attributable to issuing new shares be deducted from equity, net of
any related income tax benefit. Costs that relate to the stock market listing, or otherwise
are not incremental costs directly attributable to issuing new shares, should be recorded
as an expense in the income statement.
PAS 32.38 further requires 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) to be allocated to those transactions using a basis of
allocation that is rational and consistent with similar transactions. However, PAS 32
provides no further guidance as to what basis of allocation is rational and consistent with
the joint transactions.
Consensus:
The requirement in PAS 32.37 clearly relates to equity transactions, such as issuing or
buying back of own shares. The costs of listing shares are not considered as costs of an
“equity transaction” since no equity instrument has been issued and, hence, such costs
are recognized as an expense in profit or loss when incurred.
1
This 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.
2
Transaction costs are incremental costs 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)
1
The offering and listing of shares are usually done simultaneously. Incremental costs
that relate jointly to more than one transaction are allocated to those transactions
according to the facts and circumstances using a basis that is rational and consistent
with 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 stock
exchange listing of other shares) are allocated to those transactions using a basis of
allocation that is rational and consistent with similar transactions. No one method is
prescribed in PAS 32; hence, determining whether what basis of allocation is more
rational 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 of
new shares sold compared to the total number of outstanding shares immediately after
the new share issuance.
An assessment of the application of any method other than on the proportion of newly
sold shares to total number of shares outstanding immediately after the new share
issuance must be made, given the subjectivity that can surround such facts and
circumstances. Examples of such different allocations are:
1. An allocation based on the proportion of the number of newly issued shares
compared to the total number of shares sold through the offering (i.e., including the
shares of existing shareholders who are selling shares as part of the offering). This
approach may be appropriate if there is/are a shareholder(s) using the listing as an
exit strategy and the remaining existing shareholders have not encouraged the entity
to list for their benefit and there is evidence to support that the remaining
shareholders 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, existing
investors have not encouraged the entity to list for their own benefit (i.e., the purpose
of the listing is only to raise new capital) and there is evidence to support that the
existing shareholders do not intend to sell shares in the foreseeable future.
2
The following table provides a general indication as to some of the costs incurred in a
PO that involves issuance of new shares and concurrent listing of existing shares, and
the basis on which the costs might be allocated. The list is not exhaustive as the stock
exchange and the Securities and Exchange Commission (SEC) may prescribe additional
fees necessary to the joint transactions.
Type of Cost
Taxes:
Documentary stamp tax
Other percentage tax
Professional fees on:
Underwriting
Audit and other
professional advice
relating to prospectus
Opinion of Counsel
Tax Opinion
Fairness Opinion and
Valuation Report
Share Issuance/ Listing
General Treatment
Share issuance
Share issuance – as the PO
tax on primary offering3 is
imposed and shall be paid by
the issuing corporation
Deduction to equity
Deduction to equity
Share issuance
Joint – as it is typically
required both for the offer of
shares to the public and for
listing procedures to comply
with requirements established
by SEC and the stock
exchange
Joint – as it is typically
required both for the offer of
shares to the public and for
listing procedures to comply
with requirements established
by SEC and the stock
exchange
Joint – as it is typically
required both for the offer of
shares to the public and for
listing procedures to comply
with requirements established
by SEC and the stock
exchange
Joint – as it is typically
required both for the offer of
shares to the public and for
listing procedures to comply
with requirements established
by SEC and the stock
exchange
Deduction to equity
For allocation to equity
and expense
For allocation to equity
and expense
For allocation to equity
and expense
For allocation to equity
and expense
3
Primary 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)
3
Type of Cost
Other costs:
Prospectus design and
printing
Road show presentation
Public relations
consultant’s fees
Newspaper publication
fees
SEC registration fees for
new shares
Stock exchange listing
fees
Share Issuance/ Listing
General Treatment
Joint – although in cases
where most prospectus
copies are sent to potential
new shareholders, the
majority of such costs might
relate to share issuance
Listing – although it may help
to sell the offer to potential
investors and hence
contributes to raising equity, it
is usually a general
promotional activity
Listing – these costs
generally relate to overall
company promotion and are
not, therefore, incremental to
the share issuance
Share issuance – if the
advertising relates directly to
the share issue and is not
general advertising aimed at
enhancing the entity’s brand
Share issuance
For allocation to equity
and expense
Listing
Profit or loss item
Profit or loss item
Profit or loss item
Deduction to equity
Deduction to equity
Example
Go-public Company undertakes an IPO for the listing and issuance of 700,000 new
shares and 300,000 existing shares. In relation to this, the company incurred the
following costs:
a.
b.
c.
d.
e.
f.
Documentary stamp tax
Fairness opinion and valuation report
Tax opinion
Newspaper publication
Listing fee
Other joint costs
P
25,000
125,000
75,000
200,000
300,000
275,000
P 1,000,000
Go-public will recognize the listing fee of P300,000 immediately to profit or loss.
4
The documentary stamp tax and newspaper publication fee amounting to P25,000 and
P200,000, respectively, will be recognized as a deduction to equity.
a. Issue price of shares at above par value
Share premium
Cash/ Creditor
225,000
225,000
b. Issue price of shares at par value
Share Issuance Costs
Cash/ Creditor
225,000
225,000
The share issuance costs will be treated as a contra shareholders’ equity
account as a deduction to the following in the order of priority:
1. Share Premium from previous share issuance; or
2. Retained Earnings with appropriate disclosure.
Joint costs, which include fee for fairness opinion and valuation report, tax opinion cost
and other joint costs, amounting to P475,000 will be allocated using the proportion of
newly sold shares to the total number of shares outstanding immediately after the new
share 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 shares
issued considered as equity transaction. 1,000,000 shares were listed and
issued but only 700,000 shares have been added to the number of shares
outstanding after the listing and issuance of shares. This means that the
300,000 shares listed and issued pertain to those that were issued by existing
shareholders, 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
5
Effective Date
The consensus in this Q&A is effective for annual financial statements beginning on or
after 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
6