PHILIPPINE INTERPRETATIONS COMMITTEE (PIC) QUESTIONS AND ANSWERS (Q&As)

Q&A No. 2011 - 04 PAS 32.37-38 Costs of Public Offering of Shares Issue How should the costs of a Public Offering (PO) that involves issuing new shares and a listing with the stock exchange be accounted for? 1 Background An entity often lists its existing shares and simultaneously issues new shares. As part of the listing and offering process, the entity incurs various costs (e.g., certain legal fees, listing sponsor fees, or accounting fees) that are incremental costs and jointly relate to the listing of existing shares and issue of new shares. Paragraph 37 of PAS 32, Financial Instruments: Presentation, requires that transaction costs2 that are directly attributable to issuing new shares be deducted from equity, net of any related income tax benefit. Costs that relate to the stock market listing, or otherwise are not incremental costs directly attributable to issuing new shares, should be recorded as an expense in the income statement. PAS 32.38 further requires 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) to be allocated to those transactions using a basis of allocation that is rational and consistent with similar transactions. However, PAS 32 provides no further guidance as to what basis of allocation is rational and consistent with the joint transactions. Consensus: The requirement in PAS 32.37 clearly relates to equity transactions, such as issuing or buying back of own shares. The costs of listing shares are not considered as costs of an equity transaction since no equity instrument has been issued and, hence, such costs are recognized as an expense in profit or loss when incurred.

This Q&A does not deal with the listing of existing shares, which include treasury shares and secondary shares. Refer to PAS 32.33 for the accounting provisions on treasury shares.

Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability. (Ref.: PAS 39.9 and PFRS 9, Financial Instruments, which is effective on January 1, 2015)

The offering and listing of shares are usually done simultaneously. Incremental costs that relate jointly to more than one transaction are allocated to those transactions according to the facts and circumstances using a basis that is rational and consistent with similar transactions. PAS 32.38 clearly states that 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. No one method is prescribed in PAS 32; hence, determining whether what basis of allocation is more rational and consistent to the joint transactions requires the exercise of judgment. The most appropriate basis of allocation is one based on the proportion of the number of new shares sold compared to the total number of outstanding shares immediately after the new share issuance. An assessment of the application of any method other than on the proportion of newly sold shares to total number of shares outstanding immediately after the new share issuance must be made, given the subjectivity that can surround such facts and circumstances. Examples of such different allocations are: 1. An allocation based on the proportion of the number of newly issued shares compared to the total number of shares sold through the offering (i.e., including the shares of existing shareholders who are selling shares as part of the offering). This approach may be appropriate if there is/are a shareholder(s) using the listing as an exit strategy and the remaining existing shareholders have not encouraged the entity to list for their benefit and there is evidence to support that the remaining shareholders do not intend to sell shares in the foreseeable future. 2. An allocation entirely to the new shares sold. This approach may be appropriate if no existing shareholders are selling shares as part of the offering. Further, existing investors have not encouraged the entity to list for their own benefit (i.e., the purpose of the listing is only to raise new capital) and there is evidence to support that the existing shareholders do not intend to sell shares in the foreseeable future.

The following table provides a general indication as to some of the costs incurred in a PO that involves issuance of new shares and concurrent listing of existing shares, and the basis on which the costs might be allocated. The list is not exhaustive as the stock exchange and the Securities and Exchange Commission (SEC) may prescribe additional fees necessary to the joint transactions. Type of Cost Share Issuance/ Listing Share issuance Share issuance as the PO tax on primary offering3 is imposed and shall be paid by the issuing corporation Share issuance Joint as it is typically required both for the offer of shares to the public and for listing procedures to comply with requirements established by SEC and the stock exchange Joint as it is typically required both for the offer of shares to the public and for listing procedures to comply with requirements established by SEC and the stock exchange Joint as it is typically required both for the offer of shares to the public and for listing procedures to comply with requirements established by SEC and the stock exchange Joint as it is typically required both for the offer of shares to the public and for listing procedures to comply with requirements established by SEC and the stock exchange General Treatment Deduction to equity Deduction to equity

Taxes: Documentary stamp tax Other percentage tax

Professional fees on: Underwriting Audit and other professional advice relating to prospectus

Deduction to equity For allocation to equity and expense

Opinion of Counsel

For allocation to equity and expense

Tax Opinion

For allocation to equity and expense

Fairness Opinion and Valuation Report

For allocation to equity and expense

Primary offering refers to the original sale made to the investing public by the issuer corporation of its unissued shares of stock. (Ref.: RR 6-2008)

Type of Cost Other costs: Prospectus design and printing

Share Issuance/ Listing Joint although in cases where most prospectus copies are sent to potential new shareholders, the majority of such costs might relate to share issuance Listing although it may help to sell the offer to potential investors and hence contributes to raising equity, it is usually a general promotional activity Listing these costs generally relate to overall company promotion and are not, therefore, incremental to the share issuance Share issuance if the advertising relates directly to the share issue and is not general advertising aimed at enhancing the entitys brand Share issuance Listing

General Treatment For allocation to equity and expense

Road show presentation

Profit or loss item

Public relations consultants fees

Profit or loss item

Newspaper publication fees

Deduction to equity

SEC registration fees for new shares Stock exchange listing fees Example

Deduction to equity Profit or loss item

Go-public Company undertakes an IPO for the listing and issuance of 700,000 new shares and 300,000 existing shares. In relation to this, the company incurred the following costs: a. b. c. d. e. f. Documentary stamp tax Fairness opinion and valuation report Tax opinion Newspaper publication Listing fee Other joint costs P 25,000 125,000 75,000 200,000 300,000 275,000

P 1,000,000 Go-public will recognize the listing fee of P300,000 immediately to profit or loss.

The documentary stamp tax and newspaper publication fee amounting to P25,000 and P200,000, respectively, will be recognized as a deduction to equity. a. Issue price of shares at above par value Share premium Cash/ Creditor 225,000 225,000

b. Issue price of shares at par value Share Issuance Costs Cash/ Creditor 225,000 225,000

The share issuance costs will be treated as a contra shareholders equity account as a deduction to the following in the order of priority: 1. Share Premium from previous share issuance; or 2. Retained Earnings with appropriate disclosure. Joint costs, which include fee for fairness opinion and valuation report, tax opinion cost and other joint costs, amounting to P475,000 will be allocated using the proportion of newly sold shares to the total number of shares outstanding immediately after the new share issuance. Costs to be recognized as deduction to equity: P475,000 x 700,000/1,000,000 = P332,500 Observe that 700,000 is used for the allocation as this relates to the new shares issued considered as equity transaction. 1,000,000 shares were listed and issued but only 700,000 shares have been added to the number of shares outstanding after the listing and issuance of shares. This means that the 300,000 shares listed and issued pertain to those that were issued by existing shareholders, thus, not resulting to the issuance of new shares on the part of ABC Company. Costs to be recognized immediately in profit or loss: P475,000 x 300,000/1,000,000 = P142,500

Effective Date The consensus in this Q&A is effective for annual financial statements beginning on or after January 1, 2012. Earlier application is encouraged. ***** Q&A approved by PIC: September 21, 2011 (Original signed)

PIC Members Dalisay B. Duque, Chairman Wilfredo A. Baltazar Rosario S. Bernaldo Sharon G. Dayoan Ma. Gracia F. Casals-Diaz Edmund Go Lyn I. Javier/Reynold E. Afable Judith V. Lopez Ma. Concepcion Y. Lupisan Rufo R. Mendoza Ruby R. Seballe Wilson P. Tan Normita L. Villaruz

Q&A approved by FRSC: January 25, 2012