A.18 Recapitalization Transactions
A recapitalization is a type of reorganization designed to change an entity’s capital structure (i.e., mix
of debt and equity). Usually, these transactions involve new debt financing, issuing new shares, or
repurchasing outstanding shares. These transactions sometimes result in a change in control of the
entity undergoing the recapitalization and may or may not result in a new basis of accounting at the
entity level.
Example A-3
Recapitalization Transaction Without a Change in Control
Entities A, B, C, D, and E each own 20 percent of Company X’s issued and outstanding shares. None of the
entities has control of X. Company X buys back all of E’s shares, and the ownership of A, B, C, and D increases to
25 percent each. However, no entity obtains control of X. The transaction is a recapitalization transaction for X,
but there is no change in control over X.
Example A-4
Recapitalization Transaction With a Change in Control
Entities A, B, and C own all of Company X’s issued and outstanding shares. Entity A owns 45 percent, B owns
40 percent, and C owns 15 percent. None of the entities has control of X. Company X buys back all of C’s
shares. Entity A’s ownership increases to 53 percent. In the absence of evidence that A does not control X, a
business combination has occurred between A and X. Company X elects not to apply pushdown accounting.
The transaction is a recapitalization transaction for X and, since X elects not to apply pushdown accounting, the
basis of X’s assets or liabilities does not change when A obtains control of X.
A.18.1 Transaction Costs in a Recapitalization
Entities may incur costs related to structuring a recapitalization. An entity undergoing a recapitalization
should account for its costs on the basis of the nature of those costs. For example, costs related to
issuing debt are capitalized as debt issuance costs and amortized over the life of the debt by using
the effective interest method, costs related to issuing equity and raising capital are recognized as a
reduction to the total amount of equity raised, and costs related to advisory or legal services should be
expensed as incurred.
If the costs are billed to the entity as a single amount, we believe that the entity should apply the
guidance in paragraph 6 of SAB Topic 2.A, which states, in part:
When an investment banker provides services in connection with a business combination or asset acquisition
and also provides underwriting services associated with the issuance of debt or equity securities, the total
fees incurred by an entity should be allocated between the services received on a relative fair value basis. The
objective of the allocation is to ascribe the total fees incurred to the actual services provided by the investment
banker.
We believe that the amounts allocated to debt issuance costs should result in an effective interest rate
on the debt that is consistent with an effective market interest rate and that the amounts allocated to
equity issuance costs should be consistent with fees an underwriter would charge.
Further, we believe that if the fees are incurred by a new investor, those costs should not be recognized
in the financial statements of the entity undergoing the recapitalization unless they were incurred by the
investor on the entity’s behalf. We believe that entities should consider the guidance in SAB Topic 1.B
and SAB Topic 5.T in determining whether such costs were incurred on behalf of, and for the benefit of,
the entity. See Section A.12 for more information.