[Opinion] Accounting Treatment of Transaction Costs Incurred by the Company for Equity Transactions Including IPO Process

Himesh D. Gajjar – [2025] 173 taxmann.com 554 (Article)

An entity typically incurs various costs in issuing or acquiring its own equity instruments. Those costs might include listing fees, registration and other regulatory fees, amounts paid to legal, accounting, and other professional advisers, printing costs and stamp duties. Here, in the attached article, we will analyse the treatment of such various costs incurred by the company considering the Indian Accounting Standards and we will also analyse the areas where auditor’s judgement plays pivotal role.

When the company is in the process of getting listed, accounting for the associated transaction costs is significant part of the project cost. Every transaction relating to the equity involves combination of share issue costs and listing expenses. Share issue costs are debited to the equity and listing expenses are debited to profit & loss account and hence it becomes critical to allocate expenses between the share issue cost and listing expenses.

Ind AS 32, Financial Instruments: Presentation provides guidance for the same.

• Para 35 of the Ind AS 32 states as follows: Transaction costs of an equity transaction shall be accounted for as a deduction from equity, net of any related income tax benefit.
• Para 37 of the Ind AS 32 further states as follows: The transaction costs of an equity transaction are accounted for as a deduction from equity (net of any related income tax benefit) to the extent they are incremental costs directly attributable to the equity transaction that otherwise would have been avoided. The costs of an equity transaction that is abandoned are recognised as an expense.

Now, the auditor requires to apply his judgement to decide whether the expense is directly related to such transactions or not?

During the course of issuance of equity, company incurs various transaction cost like registration and other regulatory fees, amounts paid to legal, accounting, and other professional advisers, printing costs and stamp duties. Now, reading the requirements of Para 35 and 37 as produced above that such costs are accounted for as a deduction from equity, but only to the extent they are incremental costs directly attributable to the equity transaction that otherwise would have been avoided.

Examples of transaction cost could include registration and other regulatory fees, amounts paid to lawyers, underwriting costs and brokerage fees, fees paid to investment bankers and other professional advisers like brokers and dealers, printing costs and stamp duties. Here, auditor’s judgement is required. E.g., the company might have incurred professional fees to do feasibility study for IPO, FPO or preferential allotment. Such fees cannot be considered as a share issue expense as such fees are not directly attributable to the equity transaction as company might not opt for IPO, FPO or preferential allocation of shares.

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