Costs to issue or buy back issued shares

The accounting rule: Costs to issue or buy back issued shares by the issuing entity are accounted for as a deduction from equity, net of any related income tax benefit (the issue or buy back not being part of a business combination). 

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 (net of any related income tax benefit) 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 recognized as an expense.  (IAS 32 37Costs to issue or buy back issued sharesCosts to issue or buy back issued shares

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. (IAS 32 38Costs to issue or buy back issued shares

The amount of transaction costs accounted for as a deduction from equity is disclosed separately. (IAS 32 39)

Example

An entity issues 600,000 convertible bonds at the start of year 1 on a regulated stock exchange. The bonds have a 3-year term, and are issued at par with a face value of CU 100 per bond, resulting in total proceeds of CU 60.0 million less transaction costs amounting to 1% of the nominal value of the bonds or CU 600,000. This also represents the fair value of the issued bonds.

Interest is payable annually in arrears at a 6% rate. Each CU 100 bond is convertible at any time up to maturity into 25 ordinary shares. When the bonds were issued, the prevailing market interest rate for similar debt instruments without conversion options is 9%.

The debt component is calculated by discounting the contract cash flows (interest and principal) to present value using the discount rate of 9% (the prevailing interest rate see above).

Discount Interest End of year 1 – 60,000,000 * 6% = 3,600,000 / ((1+9%)^1)

3,302,752

Discount Interest End of year 2 – 60,000,000 * 6% = 3,600,000 / ((1+9%)^2)

3,030,048

Discount Interest End of year 3 – 60,000,000 * 6% = 3,600,000 / ((1+9%)^3)

2,779,861

Discount principal redemption End of year 3 – 60,000,000 / ((1+9%)^3)

46,331,009

TOTAL DEBT COMPONENT 3,302,752 + 3,030,048 + 2,779,861 + 46,331,009 =

55,443,670

Fair value of bonds (transaction costs are market so not deducted)

60,000,000

EQUITY COMPONENT

4,556,330

Note: the equity component is a written option that allows the holder to call for the shares on exercise of the conversion option at any time before maturity (American option). The difference between the bond’s proceeds and the debt component’s fair value of the debt component as calculated above, the residual id the equity component.

The issue costs of CU 600,000 are allocated between the equity and debt component as follows:

Equity component

Debt component

Total

Value allocated above

4,556,330

55,443,670

60,000,000

Less: Issue costs

45,563

554,437

600,000

Net proceeds and basis for journal entry

4,510,767

54,889,233

59,400,000

Just like with share capital in foreign currency (which is measured at the FX rate at issuance of the shares) the equity component is not subsequently remeasured. The resulting journal entry is as follows:

Cash

60,000,000

Issue costs payment

600,000

Shares issued

4,510,767

Debt issued

54,889,233

See also: The IFRS Foundation

Costs to issue or buy back issued shares

Costs to issue or buy back issued shares Costs to issue or buy back issued shares Costs to issue or buy back issued shares

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