5.7 Accounting for Offering Costs — SAB Topic 5.A
Expenses incurred during an IPO can be divided into those that occur as a direct
result of an IPO and those that occur as part of
an entity’s ordinary operations. SAB Topic
5.A (codified in ASC 340-10-S99-1)
indicates that “[s]pecific incremental costs
directly attributable to a proposed or actual
offering of securities may properly be deferred
and charged against the gross proceeds of the
offering.” Therefore, entities undertaking an IPO
should ensure that all costs earmarked for
deferral are incremental costs directly resulting
from the IPO as opposed to costs that are part of
an entity’s ongoing operations before or after the
IPO.
Connecting the Dots
Costs incurred during an IPO
may be significant. Therefore, the appropriate
identification of costs that qualify for deferral
is particularly important given the potential
impact on reported profit or loss if such costs
are incorrectly allocated. Similarly, entities
should be cognizant of the risk of deferring costs
that do not qualify for such treatment. In certain
cases, management may need to exercise judgment to
appropriately allocate costs and should consider
consulting with professional advisers and auditors
before making a final determination.
Costs that may qualify for deferral include registration fees, filing fees,
listing fees, specific legal and accounting costs,
and transfer agent and registrar fees. However, in
accordance with SAB Topic 5.A, costs such as
management salaries or other general and
administrative expenses generally are not
considered incremental or directly attributable to
the IPO, even though they may increase as a result
of the IPO. Such costs should be accounted for
under other accounting standards.
In rare instances, an IPO could consist solely of selling shareholders, with no new shares being issued by
the entity. In such cases, offering costs should be expensed because there are no proceeds against which
to offset the costs.
For more information about
issuance costs within the scope of SAB Topic 5.A,
see Deloitte’s Roadmaps Distinguishing
Liabilities From Equity and
Issuer’s Accounting
for Debt.
5.7.1 Aborting or Postponing an Offering
An entity that aborts an IPO can no longer defer offering costs that otherwise
qualified for deferral; rather, such deferred
costs should be immediately expensed. However, as
indicated in SAB Topic 5.A, “[a] short
postponement (up to 90 days) does not represent an
aborted offering.” In practice, postponements
regularly occur in response to market fluctuations
or entity-specific circumstances (e.g., delays in
the finalization of a contract that is intended to
form the foundation of an entity’s IPO). Judgment
should be used in the determination of whether a
postponement of more than 90 days represents an
aborted offering.
When a delay or postponement occurs, the determination of whether costs should
continue to be deferred as a result of a delay or postponement depends on
whether the costs are associated with a probable, successful future offering of
securities. To the extent that a cost will be incurred a second time or will not
provide a future benefit, it should be charged to expense.
In determining the actual postponement date, an entity may be required to use significant judgment and
consider the facts and circumstances. For example, if an offering is delayed beyond 90 days because
market conditions would not yield an acceptable return, the delay would generally be considered an
aborted offering and previously deferred offering costs would be charged to expense. Conversely, a
delay of more than 90 days could be considered a short postponement, rather than an aborted offering,
in certain circumstances. Sufficient and appropriate evidence should exist to support the assertion that
the delay of an offering of securities does not constitute an aborted offering. Factors that may indicate
that an offering has not been aborted include, but are not limited to:
- The resolution of the items causing the delay (e.g., accounting, legal, or operational matters) is
necessary for the completion of the offering. Such resolution may include:
- Completing new (or revising existing) contractual arrangements with shareholders or other parties.
- Obtaining audited financial statements for other required entities (e.g., significant acquisitions under Regulation S-X, Rule 3-05; significant equity method investments under Regulation S-X, Rule 3-09).
- A plan for resolving the delay, including a revised timetable detailing the necessary steps to achieve a registration; such a plan should be approved by the board of directors or management.
- Continuing to undertake substantive activities in accordance with the plan, demonstrating an intent to proceed with the offering.
- Continuing to prepare financial information or updating the registration statement either to respond to SEC staff review comments or because information may become stale.
Management will need to use significant judgment in determining whether a delay is a short
postponement or an aborted offering and may need to consult with accounting and legal advisers.