Stock Issuance Costs

Definition

The financial accounting term stock issuance costs refers to the expenses a corporation incurs when they issue securities to the market.  Typical costs associated with issuing stock include fees for attorneys, accountants, as well as underwriting.  Companies have the option of treating these expenses in two ways: as organization costs or a reduction to paid-in capital.

Explanation

Companies will issue capital stock to raise funds that can be subsequently used to expand business operations and create additional shareholder value.  When issuing stock to investors, corporations will incur a number of costs, including:

  • Professional Fees:  includes those for attorneys, as well as certified public accountants.
  • Commissions: underwriters that place the securities with investors will charge both fees for this service as well as sales commissions.
  • Clerical: includes both administrative and clerical costs associated with preparing regulatory filings as well as registrations.
  • Filings: expenses and fees associated with filing the issue with the Securities and Exchange Commission.
  • Marketing: advertising, mailing, and marketing costs associated with promoting the securities to investors.

Generally, a company has two options to account for stock issuance costs:

  • Debit to Paid-in Capital: treats issuance costs as a reduction to paid-in capital in excess of the security's par value.  Subscribers to this approach believe issue costs are not part of normal operations and are a function of financing activities.
  • Organization Cost:  treats issuance costs as an intangible asset that is written off over a period of time (not to exceed 40 years).  Subscribers to this approach believe in maintaining the integrity of paid-in capital in excess of par.

Related Terms

par value stock, reacquisition of shares, assessments on capital stock