Accounting for Private placements

posted Jun 6, 2012, 10:08 PM by Andrey Mozuliov   [ updated Jul 17, 2012, 9:30 AM ]

The procedure of the private placement, including the sequence of required steps is out of the scope of this discussion. For the purpose of this article, we are concentrating on procedures of the accounting entries to appropriately reflect the private placement.

The announcement of the private placement and the initial reservation of the price, generally speaking, are not accounting events. That is the realm of the Corporate Secretary, and area of his/her responsibilities.

Accounting starts at the raising money phase.

Subscription Agreement

After the announcement of the private placement, the company expects participants to come. Every participant signs the subscription agreement with the company, which creates the commitments for both parties: the participant agrees to buy shares and pay money, and the company commits to issue shares to the participant.

Subscription agreements are recorded in sales journal by means of creation of the sales invoice, which is to generate entry debiting accounts receivable, and crediting commitment to issue shares (or shares subscribed) account in the equity segment of the balance sheet.

You may either create buyer (or client) for each participant, and then create sales invoice for each of them, or use the option of “one-time buyer (client)”. If you choose the second option, never use “<one-time buyer (client)>” as a name for the participant. You know his/er name, and do not lose the opportunity to put it in record for the further reference. Just type the participant’s name at the name field, and choose the “Continue” option when Simply Accounting asks you.

Depending on nature of the business and its own specifics the company might have a considerable amount of clients in the list. Nevertheless, if it is seen possible, we recommend to create a buyer (client) for each participant of the private placement. That will ease the further analysis of the subscribers’ participation, and also recording of exercise of warrants (if any attached) in the future.

Simply Accounting - Private Placements - Subscription Invoice
Obviously, there is no hard copy of any invoice at the subscription agreement stage. However, the sales invoice is the most convenient form of
Simply Accounting - Private Placements - Subscription Invoice
recording of that transaction in Simply Accounting. If corporate secretary issues a unique number for each participant, use the one as a source ID for the invoice. If there is no number generated, compile it yourself using private placement identification number (using year and a simple sequence number) and the number of the participant in the list. Again, it is better to be aligned with the corporate secretary in using the ID number for participants.

In the line comment mention the number of shares subscribed and the price.

The date of the invoice should be the date of the subscription agreement.

Receiving money

The next step to be reflected in accounting is the receiving money from participants of the private placement. Having the sales invoice in place we need to create the receipt for each participant against the relevant invoice. When all money received, the amounts receivable for the private placement equals zero.

For the receipts use the same source number that you have used for the associated invoice.

Closing the private placement

When the approval of the private placement is received from the stock exchange, the company is to accomplish its commitment to issue shares. In order to record the share issuing in Simply Accounting the general journal entry (the manual one) should be done. Prepare the one listing every participant in separate line without grouping them. No shortcuts or easements at this stage: record everything in details for further references.

In line comments, write down the full name, the number of shares (units) issued, and the price per share (unit).

Finders’ fees

Private placements engage investors that are belong to the certain circle which is closed to the company. So, the new private placement participants (or subscribers) come mostly through the business networking, and those members of the circle who reference a new investor act in the role of the finder. Companies value new participants and the finders’ fees to appreciate the referrer is the pretty common practice this days.

For the purpose of this article we consider two types of finders’ fees.

The first type is the finders’ fees paid by cash. The record is pretty straightforward: the entry is made through the purchase invoice in correspondence with the account “Share issue cost” in equity segment of the balance sheet.

Also, the company can express its appreciation to the referrer by issuing warrants (known as “broker’s warrants”). That is the other type of finders’ fees we discuss in this article.

Warrant is gives the holder the right to purchase securities from the issuer at a specific price within a certain timeframe[1]. Warrants that attached to the shares as a part of the unit in private placement, for example, does not require to be recorded in accounting. However, broker’s warrants are treated as stock-based-compensation, and IFRS require the reflection of the fair market value of broker’s warrants in the books.

For the purpose of the calculation of the fair market value of stock-based compensation the pretty sophisticated methods with the application of Black Scholes Model is used. The exploration of methods of fair market value calculations is out of scope of this article. Also, since for the purposes of those calculations we use our own tools, we do not make any reference to online or offline sources; however, you can find a lot of information on this topic in the internet.

Since the fair market value of broker’s warrants is calculated, it is to be reflected in books debiting “share issue cost” and crediting “contributed surplus” accounts, both in equity segment of the balance sheet.