Accounting Standards

Equity - Costs of an Equity Transaction

Paragraph 11 of FRS 1, Presentation of Financial Statements, requires that financial statements should not be described as complying with Financial Reporting Standards unless they comply with all the requirements of each applicable Standard and each applicable Interpretation of the Financial Reporting Standard. INT FRSs are not intended to apply to immaterial items.

Reference: FRS 32, Financial Instruments: Disclosure and Presentation

1. An enterprise typically incurs various costs in issuing a financial instrument classified as equity under FRS 32 or in acquiring its own equity instruments. Those costs might include registration and other regulatory fees, amounts paid to legal, accounting, and other professional advisors, printing costs, stamp duties and internal costs of the enterprise such as the use of management and other resources. Costs such as underwriting fees may, in some cases, be deducted by the financial intermediaries directly from the proceeds of a share issuance.


2. The issues are:
   
   1. what is comprised by the transaction costs of issuing equity instruments or of acquiring an enterprise's own equity instruments; and
      
      
   2. how such transaction costs should be accounted for by the enterprise.
   
   
3. This Interpretation applies to the costs of issuing or acquiring an enterprise's own instruments classified by that enterprise as equity under FRS 32 when that issuance or acquisition results in a net increase or decrease to equity (costs of an "equity transaction"). However, this Interpretation does not apply to the costs of issuing an equity instrument that are directly attributable to the acquisition of a business (see FRS 22, Business Combinations). Examples of costs that are not considered costs of an equity transaction as described in this Interpretation include the costs of listings of shares on a stock exchange, a secondary offering of shares, a share split or a stock dividend.


4. FRS 32 does not apply to employers' obligations under employee share option and share purchase plans. Additionally, FRS 19, Employee Benefits, does not specify recognition and measurement requirements for equity compensation benefits. Accordingly, this Interpretation does not address recognition or measurement requirements for compensation benefits related to the issuance or acquisition of equity instruments in connection with such plans and does not apply to the costs of such transactions.

Costs of an equity transaction are comprised of only those incremental external costs directly attributable to the equity transaction (defined in paragraphs 3 and 4) which would otherwise have been avoided.

Transaction costs incurred as a necessary part of completing the equity transaction are accounted for as part of the transaction to which they relate. Linking the equity transaction and costs of the transaction reflects the total cost of the transaction in equity. This approach achieves a result which is consistent with FRS 32.31 which indicates that the classification of a financial instrument in the balance sheet determines whether interest, dividends, losses and gains relating to that instrument are reported in the income statement. As a result, losses relating to a financial instrument classified as equity of the issuer are reported by the issuer as movements in equity.

Linking the transaction costs to an equity transaction implies that costs subject to this Interpretation should be limited to those external costs which would otherwise have been avoided and are associated with instruments of the issuing enterprise that are classified by that enterprise as equity under FRS 32.

Effective Date: INT FRS 17 comes into effect on 1 February 2003. Changes in accounting policies should be accounted for according to the transitional requirements in FRS 8.40.