IFRS 2 - Price difference between the institutional offer price and the retail offer price for shares in an initial public offering

Date recorded:

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:

(a) 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

(b) 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 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 expense. 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:

(a) 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

(b) Approach 2: the price difference does not represent goods or services received and the difference would not be recognised as an expense.

The Committee discussed this issue in the September 2013 meeting where they decided the issue is not widespread. In addition, the Committee concluded that the issue is outside the scope of IFRS 2. The Committee tentatively observed that the price negotiated between the issuer and the retail investor and between the issuer and the institutional investor is accepted as the fair value of the transaction, regardless of the fact that the retail investor and the institutional investor are acquiring shares at the same time.

Staff presented their draft agenda decision in this meeting and asked the Committee for comments.

One member suggested the agenda decision should be more specific and it should provide detail of how the Committee came to the conclusion.

Another member said he disagreed with a specific part of the agenda decision as the issue is common and not limited to a few jurisdictions. Also paragraph 3 in the agenda decision should highlight the fair value of the consideration. Another member agreed and said the issue is common also in the US and therefore suggested that the last paragraph should be deleted.

A member said that the second paragraph should show there are no identifiable goods or services that were provided and refer to BC18 C and D.

Three members are to help Staff revise the draft agenda decision.

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