Veteran Auditor Dolphy D’Souza on “Whether

IPO Expenses Should Be Debited to P&L?”

Posted Apr 29, 2022

Dolphy D'souza

Senior Partner, SRBC & Co. LLP, Chartered Accountants

Initial Public Offer (IPO) costs involves 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, Share issue
fees for legal and tax
advice related to share
issue

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 Underwriting fees Share issue
Listing fees paid to stock Listing
exchange/regulator
Accountants' fees relating Both - in practice IPO documents typically relate both to the
to prospectus share offer and the listing.
Valuation fees in respect of Share issue
valuation of shares
Valuation fees in respect of Both. Because IPO documents typically relate to both the
valuation of assets other share offer and the listing. However, if the valuation is not
than shares (e.g., property) required to be disclosed in the prospectus, such costs is not
if the valuation is required directly attributable to the IPO and should be expensed.
to be disclosed in the
prospectus
Tax and legal entity P&L Expense. Corporate restructurings are undertaken as a
restructuring costs in housekeeping matter to facilitate the listing process and are
anticipation of the IPO not directly attributable to the issue of new shares.
Legal fees other than those Both - legal advice is typically required both for the offer of
relating to restructuring in shares to the public and for the listing procedures to comply
IPO above with the requirements established by the relevant securities
regulator/exchange. However, some legal fees may relate to
specifically to share issue or to listing.
Prospectus design and Both - although in cases where most prospectus copies are
printing costs 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 Although the "roadshow" might help to sell the offer to
costs 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 Both – they need to be allocated on a rational basis between
Bankers/Manager’s costs share issue costs and listing expenses
Costs of general advertising These are not related to issuance of equity shares and should
aimed at enhancing the be charged to P&L.
entity's brand; and fees
paid to public relations firm
for enhancing the image
and branding of the entity
as a whole

“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

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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
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 (basis 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 Existing shares OFS investors
INR INR INR
Total cost allocated @ 33 33 33
1/3rd each
Reimbursement from - - (20)
OFS investors
Listing expenses 20 33 13
rd
charged to P&L (1/3 share of INR 60)
Share issue costs 13 - -
charged to equity

Based on the above, the total costs 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.

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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.

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