In June 2013, the Committee received a request to clarify how an entity should account for a price difference between the institutional offer price and the retail offer price for shares issued in an initial public offering (IPO). The submitter refers to the fact that the final retail price could be different from the institutional price because of:

1. an unintentional difference arising from the book-building process or derived from a change in the fair value of the shares between the time the indicative offer price is set and the time the institutional price is determined; or
2. an intentional difference arising from a discount given to retail investors as indicated in the prospectus.

The submitter notes that there are divergent views on whether the difference between the retail offer price and the institutional offer price (i.e. when the former price is lower than the latter), can be analysed within the scope of IFRS 2 or whether this difference could be analysed as an equity transaction (i.e. a transaction with owners in their capacity as owners) in accordance with IFRS 10.

Staff performed outreach on this issue and found that this issue is generally not common. Eight out of ten respondents had not observed differences in share prices between the retail offer price and the institutional offer price within the context of an IPO. Of the two that had seen differences, one accounted for the transactions as a share based payment transactions and recognised the discount granted as an expenses. The other did not provide detail of the accounting treatment but found that this issue for them was relatively common.

Staff identified two approaches for dealing with the price difference between the final offer and price and institutional priced (where it was intentionally lower and therefore the difference is looked at as a discount) as follows:

1. Approach 1: the price difference represents unidentifiable goods or services received, in which case an expense is recognised in profit or loss for the amount of the discount given to retail investors; and
2. Approach 2: the price difference does not represent goods or services received and the difference would not be recognised as an expense.

With approach 2 there are two further views on how the equity instruments issued to retail investors would be measured by the issues as follows:

1. Approach 2A—the equity instruments are recorded at the fair value of the consideration received (based on the final retail offer price paid). The discount given retail investor should not be recognised; and
2. Approach 2B—the equity instruments are recorded at the fair value of the shares issued (based on the institutional price paid). The discount given to the retail investors is considered a transaction cost and deducted from equity.

Staff support view 2B because the main reason the entity issued equity instruments is to obtain financing from the general public and not to obtain goods or services from the retail investor. Retail investors are not providing goods or services as defined in IFRS 2 and therefore the treatment of this scheme would be outside of the scope of this standard. In addition, approach B deals with the discount provided to retail investors which approach 2A does not account for. Without the discount the issuer would not be able to attract the number of retail investors to ensure that the required shareholder spread will be met. In addition, providing finance is not seen as a service as defined in IFRS 2. Consequently Staff believe paragraph 33 and 37 of IAS 32 should be applied where equity instruments issued should be measured at the fair value of the share issued based on the institutional price. The discount given to the retail investors would be recognised as a transaction cost that will be deducted from equity. Consequently, equity will be initially credited for the fair value of the shares issued based on the institutional price paid and it will subsequently be debited by the amount of the discount offered to retail investors.

Other Staff agreed with approach 1 as they believe the discount provided to the retail investors provides a specific benefit to the entity i.e. the ability to achieve the regulatory requirement of a minimum number of shareholders, and so the discount is the ‘cost’ of meeting that regulatory requirement. However, as opposed to Approach 2B, the staff who support this view think that the difference between the institutional price and the final retail price (i.e. the discount given to the retail investor) represents consideration that the issuer received that cannot be specifically identified (i.e. an unidentified service) and that should be recognised as an expense in accordance with IFRS 2. They believe this in line with example 1 of the Implementation Guidance of IFRS 2, which was introduced by IFRIC 8 and later incorporated into IFRS  2.

There may be situations where unintentional differences may arise due to misjudgement when stating the indicative retail offer price or from a change in the fair value of the shares between the time the indicative offer price is set and the time the intuitional price is determined. As above the treatment of this could be accounted for either as an unidentifiable good or service in accordance with IFRS 2 or not recorded at all. Staff believe that in either cases the unintended difference should not be recognised in the profit and loss account. In both cases the issue of shares should be measured at the amount of the proceeds received (based on the final offer price paid) in accordance with paragraph 33 of IAS 32. This view would be consistent with Approach 2A.

Based on Staff’s analysis and assessment of the agenda criteria, Staff recommend the Committee should not take this issue onto its agenda. Due to mixed staff views they deferred the issue of a tentative agenda decision until after the Committee has discussed this in the September 2013 meeting, which they will bring in a future meeting.

The September 2013 meeting began with members questioning why staff viewed that retail investors were getting a discount rather than institutional investors paying a premium and therefore which price is the fair value.

The Chairman explained that this specific question was raised from Malaysia where the Government laws are that a company that wants to undergo an IPO must issue shares to retail investors first.

A member added that under such circumstances both prices can be seen as being the fair values as they are both on different markets. Under US GAAP the reason for the price difference would need to be carefully understood and analysed and the accounting treatment would follow on from there.

Another member added that the principle behind IFRIC 8 is to look at whether a service is provided - in this case, the company obtains a diverse shareholding, which therefore cannot be seen as a benefit and hence IFRIC 8 cannot apply. In agreement, another member said that the treatment should be outside the scope of IFRS 2 as it is a transaction with shareholders and therefore should be treated under IAS 32.

A member raised concern as to what the differentiating factor between IFRS 2 and IAS 32 is and if this was a matter of judgement or if there is a principle behind this to help decide which standard to apply. The member added that because retail investors are setting the market, the price they pay should be seen as the fair value.

Another member added that as this issue is not widespread, the treatment of it should focus on each individual case, where the facts and circumstances are closely analysed and management use their judgement in accounting for it.

There was suggestion that educational guidance should be issued that is based on the scenario’s fact pattern to determine the treatment under IFRS 2 or IAS 32. The Committee agreed not to issue educational guidance.

Another member said they have not seen much diversity in practice and where they have come across the situation, the treatment has been to adopt the equity approach.

A member added that the transactions between the investors and retailers is interlinked, both prices are at fair value and therefore cannot be treated under IFRS 2. Also the discount seems to be imposed by local law and therefore the difference can be seen as a cost of listing.

The Committee concluded whereby the Chairman explained that there are two approaches as follows:

• Dr Cash and Cr paid in capital; or
• Dr Cash, Cr paid in capital and Dr expenses.

By way of vote, majority of committee members agreed with Dr Cash and Cr paid in capital. Staff are to bring this back to the Committee in a future meeting by way of an agenda decision.