Treatment of professional fees paid to raise capital

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spramod69
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Treatment of professional fees paid to raise capital

Post by spramod69 »

Hello Everyone,

We have engaged one external agency to help us to raise equity capital. As per engagement letter, we are supposed to pay this agency a fixed monthly fees and completion fees (in % terms) after successful raise of capital . We should see the result by end of this year i.e. Dec'2020.

Would like to know the accounting treatment we should give to this transaction as per IFRS,
- The monthly fixed fees which we are paying in both scenarios i.e. either successful in raising capital or not
- The % fees in the event its successful.

Thanks.
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JRSB
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Re: Treatment of professional fees paid to raise capital

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It's only incremental/avoidable costs that can go against equity so that would be the fixed percentage only?
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JRSB
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Re: Treatment of professional fees paid to raise capital

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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.
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Marek Muc
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Re: Treatment of professional fees paid to raise capital

Post by Marek Muc »

JRSB wrote: 08 Jul 2020, 14:26 It's only incremental/avoidable costs that can go against equity
*unavoidable

I agree with JRSB, monthly fees go to P/L as incurred, % fees can be deducted from equity (at least it seems so with no details available)
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JRSB
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Re: Treatment of professional fees paid to raise capital

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Oops yes!
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exIFRS
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Re: Treatment of professional fees paid to raise capital

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Personally that feels like a very strict reading of incremental. I would apply the "but for test". But for the intention to raise the capital would we have incurred the cost. In this case I believe the answer is no. So the entire amount is accrued as share issue costs (contra-equity), in the event the share raising is unsuccessful it gets dumped into expenses. But obviously it is perhaps not as clear as I think.

Interestingly the IFRIC has been asked to clarify this in 2008:
The IFRIC received a request for guidance on the extent of transaction costs to be accounted for as a deduction from equity in accordance with IAS 32 paragraph 37 and on how the requirements of IAS 32 paragraph 38 to allocate transaction costs that relate jointly to one or more transaction should be applied. This issue relates specifically to the meaning of the terms ‘incremental’ and ‘directly attributable’.

The IFRIC noted that only incremental costs directly attributable to issuing new equity instruments or acquiring previously outstanding equity instruments are related to an equity transaction in accordance with IAS 32. The IFRIC also noted that judgement will be required to determine which costs are related solely to other activities undertaken at the same time as issuing equity, such as becoming a public company or acquiring an exchange listing, and which are costs that relate jointly to both activities that must be allocated in accordance with paragraph 38.

Decision not to add
September 2008

Reason
In view of the existing guidance, the IFRIC decided not to add this issue to its agenda. However, the IFRIC also noted that the terms ‘incremental’ and ‘directly attributable’ are used with similar but not identical meanings in many Standards and Interpretations. The IFRIC recommended that common definitions should be developed for both terms and added to the Glossary as part of the Board’s annual improvements project.
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Marek Muc
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Re: Treatment of professional fees paid to raise capital

Post by Marek Muc »

A lot happened in IFRS since 2008 :)

Under IFRS 15, "the incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, a sales commission)". A very similar definition is included in IFRS 16 for initial direct costs "Incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained"...

I guess these definitions are not so inclusive, are they?
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JRSB
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Re: Treatment of professional fees paid to raise capital

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Are the company absolutely and solely only engaged in raising capital? So they are not advising on structures, share prices, looking at debt options, advising on warrants that might be attached, market sentiment (all of which have value even if no investor found)? ONLY looking for investors to buy the new shares?
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spramod69
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Re: Treatment of professional fees paid to raise capital

Post by spramod69 »

Thank you everyone.

What I get from the conversation,
1. The monthly fees will hit to P & L irrespective of raising capital successful or not, as its incurred.
2.The % completion fees will be netted off against equity in case raising capital is successful as its directly attributable to it.

Correct me if my above understanding is incorrect.

Thanks a lot once again!
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Marek Muc
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Re: Treatment of professional fees paid to raise capital

Post by Marek Muc »

yes, but the key is the disctinction between incremental and non-incremental costs

@exIFRS
I looked at the glossary to IFRS bound volume, and here we go :)
transaction costs (financial instruments) - Incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability (see paragraph B5.4.8 of IFRS 9). An incremental cost is one that would not have been incurred if the entity had not acquired, issued or disposed of the financial instrument.
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nauman
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Re: Treatment of professional fees paid to raise capital

Post by nauman »

I would even take the monthly fee to equity (in case company was successful in raising the capital). The question is on incremental, not on whether the equity round would be successful or unsuccessful. If the company was not going ahead with the decision to raise capital, they would not have incurred the monthly expense as well.
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Marek Muc
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Re: Treatment of professional fees paid to raise capital

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They would have to incur the monthly fee irrespective of actual equity issuance...
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JRSB
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Re: Treatment of professional fees paid to raise capital

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I don't agree with the monthly fee going to equity. I think a good way to look at it is that costs are only deducted once a share premium arises from which to deduct it.
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nauman
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Re: Treatment of professional fees paid to raise capital

Post by nauman »

The fact that it is a monthly fee is just a matter and question payment terms negotiated. The standard looks at costs which are incidental to equity issuance and I feel these are. If you were not going to raise this equity (regardless of whether it will be successful or not) you would not have incurred this cost.
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JRSB
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Re: Treatment of professional fees paid to raise capital

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But you could have the intention of raising equity, and then find there is insufficient interest. would you still put the expenses to equity?
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exIFRS
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Re: Treatment of professional fees paid to raise capital

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To be fair IAS 32 Para 37 says that "the costs of an equity transaction that is abandoned are recognised as an expense" so no it would not still be in equity. But that implies to me otherwise, if not abandoned but successful, they would be recognised as a contra-equity (by application of the "exception to the rule" logic).
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JRSB
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Re: Treatment of professional fees paid to raise capital

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To get really into nitty-gritty if there is no interest in investing then there is no transaction to abandon either - but fairly clear cut I would think.
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