Information about Stock Issuance Costs

Information about Stock Issuance Costs

One very good option for generating capital for business is issuance of stock. Certain government bodies and financial institutions governs this process. Now, this issuance comes at a cost, and here we shall see how these costs are accommodated in the accounting books. Keep reading...
The cost of issuing stocks is an inevitable hurdle towards raising capital for a said corporation or company or even LLC. Governing bodies that implement securities laws, and govern all the securities markets are ones that define, enforce and also see through the execution of all the stock issuance. A prominent example is, of course, the United States Securities and Exchange Commission.

The volume of stock issuance cost always differs, and the rules that apply substantially change as per the governing legislation of the company. For example, the issuance cost for an S-corporation would be different from a company incorporated under the Delaware General Corporation Law.

Overall though, the rates and amounts of such stock issuance, rates and minor rules, tend to differ from legislation to legislation and jurisdiction to jurisdiction, but the basic concepts of such costs, terms, definitions, mechanisms and practices are the same in almost all the nations.

About Cost of Issuing Stocks

What is stock issuance? Simple, every company needs capital to raise money for its operations and also to buy assets. In the modern company / joint stock company / corporation form of business organization, capital is principally raised through issue of stock and shares.

In such a capital raising activity, common stock or the authorized capital is divided into several different equally denominated shares that have a small price such $10 or $25. They are issued or sold to the common public. These shares are freely transferable and can be sold through a stock exchange, at dynamic market values.

The activity of actually selling the shares and raising money is quite difficult, and the cost that is involved to do so, is not small. It must be noted that issuance costs which are termed to be 'debt issuance costs' are not just applicable for stock issuance, but are also applicable for bonds, debentures and other securities that are used to raise capital.

Stock issuance costs usually include the following:
  • The first type of cost that is incurred is the various fees. This would include the fees paid to lawyers, registrars, commissions for debt issuance, etc. The most important of these fees is however the fees that are paid to the United States Securities and Exchange commission and the stock exchanges for registrations and compliance.
  • The second category of fees include the ones that are paid to introduce the shares to the common public. This would include, the fees and commission to underwriter, and other costs that would be incurred on the occasion of generation of such securities. This would also include making a prospectus that gives in-depth information about the company. There are several different compliance such as, fees and deposits that have to be credited within the company. This involves the generation of deposits, and though these are not exactly fees, the company needs to put together a lot money as a security.
  • The last of the issuance costs are the ones that include the IPO process costs that is Initial Public Offer costs. Investor bank charges and bank processing charges are also included in the issuance costs. These costs are quite small. However the company might issue the shares at a discount or it might also issue the shares at a premium (i.e.: at a higher price). If the shares are issued at a discount, then it is basically a loss for the company.
It must be noted that the issuance costs are imposed by the regulatory laws of the government, so as to ensure that the finances that are invested by the public into the company are not misused. The compliance is not a red tape but is more of a barrier of security.

Accounting Costs of Stock Issuance

Accounting for preferred stock issuance is not that difficult and the following are some of the important accounting entries that come into the picture:

Here's what actually happens:

Cash A/c ... Dr
To Common Stock A/c ... Cr
To Additional Paid up Capital ... Cr

Stock Issuance Cost A/c ... Dr
To Cash A/c ... Cr

In cases where the company recovers that cost from the shareholders at the time of issuance itself the following combined entry is passed

Cash A/c ... Dr
To Common Stock A/c ... Cr
To Additional Paid up Capital ... Cr
To Stock Issuance Cost A/c ... Cr

Recovering the amount instantly from the applying shareholders is however not permitted in some cases. The same entry can be passed in the books of the purchasing shareholder, and is known as the stock issuance purchase method. Here's the entry...

Common Stock/Shares A/c ... Dr
To Cash/Share application A/c ... Dr

Here's a stock issuance example, please note that it is a hypothetical example for elaboration of the accounting entry.

Cash A/c ... Dr $,5400
To Common Stock A/c ... Cr $4000
To Additional Paid up Capital ... Cr $1500
To Stock Issuance Cost A/c ... Cr $100

This eventually affects the total market capitalization of the company's stocks. Thus, from the above hypothetical example, effectively, there is only $5400 worth of capital in the company's common stock.

In conclusion, it can be said that sometimes the total cost of stock issuance takes up only a small minuscule percentage of the total stock. Hopefully, the above given information proves of some help to you.