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Accounting For Series "A" Legal Fees

Accounting For Series A Legal FeesHello,  I am the first accountant for a start-up company and had a question regarding the legal fees incurred related to Series A Funding.  Should these fees be expensed or offset to the Additional PIC capital account?  The company has already issued common stock (mainly to founders and employees).  Any advice on this topic would be greatly appreciated.

Answers

Topic Expert
Edward Abbati
Title: Vice President of Finance
Company: Location Labs
LinkedIn Profile
(Vice President of Finance, Location Labs) |

We accounted for all closing costs on our Balance Sheet as a separate account called Series A, Closing Costs. In other words, we did not expense them but showed them as a contra Equity account.

Diane D. White, CPA, CMA, MBA
Title: Principal and Business Owner
Company: Diane D. White, CPA, CMA
(Principal and Business Owner, Diane D. White, CPA, CMA) |

We expensed them, and in our case I didn't feel comfortable with not doing so anyway, because the proposed Series A debt offering on which we incurred the legal fees wasn't ever completed. However, when we then structured a convertible debt offering that did go, I expensed legal fees for that also, since there's no assurance that the debt holders will convert. Anyone have a comment?

Robert Honeyman
Title: CFO
Company: Advanced Predictive Analytics
(CFO, Advanced Predictive Analytics) |

SEC accounting requires capitalizing the costs associated with a raise and accreting the amount over a logical period. If a debt raise, accrete over the period of the loan term. If an equity raise, is there a redemption clause? If so, you can use that to define the accretion period. I believe the proper treatment is to classify the costs as an intangible asset and accrete to a contra-account in the section of the balance sheet carrying the value of the funds raised.

If you are not intending to follow SEC accounting standards (i.e., you don't intend to go public nor do you intend to be acquired by a publicly trading entity), you can follow IRS guidelines. I believe the IRS allows you to book the net amount raised to the debt or equity section.

Diane D. White, CPA, CMA, MBA
Title: Principal and Business Owner
Company: Diane D. White, CPA, CMA
(Principal and Business Owner, Diane D. White, CPA, CMA) |

Thanks, this was helpful. The client company does not intend to go public; it is a very small start-up with hopes of selling out to an established company within three years....most likely buyer would be a privately held medium size company in the same web information provider space. I'll look over the IRS guidelines. One other quick question is, do the IRS guidelines apply only to an entity's "Tax Books"? Thanks to anyone who can comment.

Ted Monohon
Title: VP -Finance / Controller
Company: Fantex
(VP -Finance / Controller, Fantex) |

Per the codification Staff Bulletins of the SEC (Topic 5):

A. Expenses of Offering:

Facts: Prior to the effective date of an offering of equity securities, Company Y incurs certain expenses related to the offering.

Question: Should such costs be deferred?

Interpretive Response: Specific incremental costs directly attributable to a proposed or actual offering of securities may properly be deferred and charged against the gross proceeds of the offering. However, management salaries or other general and administrative expenses may not be allocated as costs of the offering and deferred costs of an aborted offering may not be deferred and charged against proceeds of a subsequent offering. A short postponement (up to 90 days) does not represent an aborted offering

So, you should capitalize the legal and other direct costs associated with the Series A and net it against APIC. There is no provision to amortize permanent equity cost. You would however amortize cost associated with the issuance of debt using the effective interest method.

GAAP generally follows the same process, although there is some ability to put these costs to "organizational" costs and amortizing them as you would other intangibles, but my experience this is only done on the formation of the business and not for subsequent raises of equity.

Good luck!

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