What is initial public offering

What is initial public offering

An Initial Public Offering (IPO) comprises of a privately owned business that wants access the public capital market through the sale of securities (shares in the before IPO privately owned business). Thereby, the business can raise monies more readily than by the retention of profits in order to also grow through acquiring other businesses. Other possible motivations for an IPO include the prestige of ownership of a public company or the desire of major shareholders to exit the company.

Back-door listings

Another way that entities may list is through a reverse restructure with an existing non-operating listed entity that has few assets or liabilities (i.e. a shell company) or a Special Purpose Acquisition Company (SPAC).

Special Purpose Acquisition Companies (SPACs) are publicly traded companies formed for the sole purpose of raising capital through an IPO and using the IPO proceeds to acquire one or more unspecified businesses in the future.

The management team that forms the SPAC (the “sponsor”) forms the entity and funds the offering expenses in exchange for founder shares. There are various tax considerations and complexities that can have significant implications both during the SPAC formation process and down the road.

Under these circumstances where a private entity is ‘acquired’ by the listed entity, this is commonly referred to as aWhat is initial public offering back-door listing. Since the listed non-operating entity is not a business, the transaction is not a business combination. Normally such transactions are accounted for similar to reverse acquisitions.

However, because the accounting acquiree is not a business the transaction is considered a share-based payment. That is, the private entity is deemed to have issued shares to obtain control of the listed entity and to the extent their fair value exceeds the fair value of the listed entity’s identifiable net assets an expense will arise.

Disclosure of key judgements

Determining the appropriate accounting treatment of a reverse restructure with an existing non-operating listed entity that has few assets or liabilities (i.e. a shell company) or a SPAC often involves judgements. Therefore entities need to ensure that they comply with the disclosure requirements of IAS 1 Presentation of Financial Statements (‘IAS 1’), specifically paragraph 122.

This requires disclosure of judgements made by management in the process of applying an entity’s accounting policies that have a significant effect on the amounts recognised in the financial statements. It is important to note that disclosures regarding significant judgements (and key assumptions and sources of estimation uncertainty) in applying accounting policies (IAS 1.122 and 125 Sources of estimation uncertainty) are a key focus area for any listing agency.

Something else -   Disclosure requirements IFRS 4 and IFRS 17

Cost of initial public offering

Regarding the cost of intitial public offering is IAS 32 Financial Instruments: Presentation.

The costs of an IPO that involves both issuing new shares and a stock market listing should be accounted for as follows:

  • Incremental costs that are directly attributable to issuing new shares should be deducted from equity (net of any income tax benefit) – IAS 32.37; and
  • Costs that relate to the stock market listing, or are otherwise not incremental and directly attributable to issuing new shares, should be recorded as an expense in the statement of comprehensive income.

Costs that relate to both share issuance and listing should be allocated between those functions on a rational and consistent basis (IAS 32.38). In the absence of a more specific basis for apportionment, an allocation of common costs based on the proportion of new shares issued to the total number of (new and existing) shares listed is an acceptable approach.

Entities commonly raise additional equity through a public offer of shares and concurrently list new and existing shares on a stock exchange (an exercise referred to as an IPO). The listing creates an active market in the shares and thereby provides liquidity to new and existing shareholders (along with other benefits and obligations).

IAS 32.37 requires that: “The costs of an equity transaction are accounted for as a deduction from equity (net of any related income tax benefit)”. Raising additional equity through the offering and issuance of new shares is an equity transaction for this purpose, but the listing procedure is not. Only costs attributable to the offer of new shares are deducted from equity.

In practice, the offering and listing are usually a combined exercise. Certain costs, such as stamp duties and underwriters’ fees, are clearly attributable to raising additional equity. Such costs should be deducted from the sales proceeds received on the issuance of shares (minus a tax credit or not).

Other costs, such as listing fees, relate only to the listing and should be expensed. However, the following costs should be considered:What is initial public offering

  • Legal fees;
  • Accountants’ fees;
  • Other professional advisers’ costs; and
  • Prospectus design and printing costs.

These are likely to relate to both functions. Such shared costs should be allocated on a systematic basis between the share issue and the listing and then recorded in part as an equity deduction and in part as an expense.

Something else -   Trade and other payables

The following table provides a general indication as to some of the costs incurred in an IPO, and the basis on which they might be allocated. The requirements and practices for issuing and listing shares differ significantly between jurisdictions and stock markets, therefore the costs incurred and their allocation will also vary depending on the specific facts and circumstances.

Type of costs/expense

Allocation (share-issue, listing or both?)

Stamp duties

Share issue

Underwriting fees

Share issue

Listing fees


Accountants’ fees relating to prospectus

Both – a prospectus type document may be required for an offer without a listing and vice versa, but in practice IPO documents typically relate both to the offer and the listing

Legal fees

Both – legal advice is typically required both for the offer of shares to the public and for the listing procedures to comply with the requirements established by the relevant securities regulator/exchange

Prospectus design and printing costs

Both – although in cases where most prospectus copies are sent to potential new shareholders the majority of such costs might relate to the share issue

Sponsor’s fees

Both – to the extent the sponsor’s activities relate to identifying potential new shareholders and persuading them to invest, the cost relate to the share issue. The activities of the sponsor related to compliance with the relevant stock exchange requirements should be expensed.

Public relations consultant’s fees

Expense – companies typically engage PR consultants to raise the company’s profile which contributes to the ability to issue new shares. However, PR costs generally relate to general company promotion and are not therefore directly attributable to the share issue.

“Roadshow” costs

Expense – although the “roadshow” might help to sell the offer to potential investors and hence contributes to raising equity, it is usually a general promotional activity. Hence the associated costs may not be sufficiently directly related to the share issues to justify deduction from equity. Further, a significant portion of any costs may not be incremental e.g. management time.


Entity A undertakes an IPO in which 500,000 new shares are issued and a total of 750,000 new and existing shares are listed. Costs incurred include:

  • Underwriting fees of $200,000;Invoice
  • Listing fee of $100,000;
  • Accountant’s and legal fees of $300,000 relating to the offer and listing;
  • Roadshow costs and fees paid to PR consultants of $150,000

Ignoring tax effects, how should these costs be accounted for?

  • The underwriting fees should be deducted from equity;
  • The listing fee and roadshow/PR consultants charges should be expensed;
  • Accountant’s and legal fees should be allocated between the offer and the listing, one basis being in proportion to the new/existing shares as follows:

Allocated to new share issues (equity): (500,000 / 750,000) x $300,000 = $200,000

Allocated to listing (expense): (250,000 / 750,000) x $300,000 = $100,000

The respective entries for the IPO costs are as follows:

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Equity (underwriting = allocation of legal/accountant’s fees)


Statement of comprehensive income (listing + allocation of legal/accountant’s fees + roadshow/PR consultancy).




IPO costs cash flow classification

When preparing the accompanying cash flow statement, costs which have been expensed should be included in operating cash flows while costs deducted from equity should be included as financing cash flows.

Something else -   Impairment of assets

Share-based payments at IPO

It is common for companies to issue new share options or amend existing employee share options prior to an IPO. An example includes the issue of options which vest upon the successful completion of an IPO together with a specified service requirement (i.e. an employee is required to be employed at the time an IPO is successfully completed).

The key issue is whether a requirement for an IPO to occur for an award to vest is a vesting condition or a non-vesting condition, as the distinction has different impacts on the accounting treatment, and depends on any related service condition. For example, non-vesting conditions are reflected in the grant-date fair value however, there is no true-up for failure to satisfy the condition. In comparison, vesting conditions with a non-market performance condition are not reflected in the grant-date fair value however, there is a true-up for failure to satisfy the condition (IFRS 2 Share-based payment – Disclosure requirements).

In determining whether the requirement for an IPO to occur is a vesting or non-vesting condition one needs to consider the service requirement. Where there is no service requirement or the service period is shorter than the period to the IPO then the IPO should be treated as a non-vesting condition. However, where the service period is the same or longer than the period to the IPO then the IPO should be treated as a vesting condition.

In the event that an IPO condition is considered to be a vesting condition, should the IPO not take place resulting in the option not vesting, any expense recognised to date in terms of IFRS 2 Share-based Payment will need to be reversed. However, if an IPO condition is considered to be a non-vesting condition and an IPO is not successful any expense recognised in terms of IFRS 2 will not be reversed.

Furthermore, in circumstances where existing share options are amended in anticipation of an IPO, entities need to consider both the accounting and tax consequences of these amendments. Where an amendment of share options is treated as a cancellation this results in an acceleration of vesting. The amount that would otherwise have been recognised for services received over the remainder of the vesting period is, therefore, recognised immediately.

Annualreporting provides financial reporting narratives using IFRS keywords and terminology for free to students and others interested in financial reporting. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction.

Something else -   Prospective financial information

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