Accounting for legal fees and other direct costs of fundraising
Let's talk about accounting of equity financing transaction and related direct costs under US GAAP
Background
In 2025, the reporting entity incurred $300,000 in legal fees in connection with the agreement to raise $5 million by issuing 50 million shares of common stock. How should these amounts be presented in the financial statements?
Relevant Guidance
The accounting for costs associated with raising capital has relatively limited guidance. FASB ASC 340-10-S99-1 contains the requirement to reduce proceeds from the issuance of instruments classified as equity by the amount of associated direct costs. To qualify for capitalization, costs should be directly associated with the raise.
At the same time, this guidance explicitly excludes the following costs from its scope:
costs of aborted offerings,
management salaries, and
general and administrative (G&A).
Further, direct costs related to obtaining the equity financing would also be expensed in any of the situations listed below:
An offering that has been postponed for an extended period of time.
An offering that has been cancelled.
Capital transaction with no proceeds received by the entity:
An IPO in which only pre-existing shareholders sell stock.
Secondary sales.
As a side note, we would also always expense any direct costs of fundraising via the sale of tokens. This assumes that tokens do not represent debt or equity instruments for accounting purposes:
If tokens represent an equity instrument, the reporting entity would follow the respective guidance for direct costs of equity financing, as discussed throughout this post.
If tokens represent a debt instrument, we would follow the respective guidance for debt issuance costs, which we do not cover today.
Scenarios in which Direct Costs are Capitalized
As discussed above, to qualify for capitalization, costs must be directly associated with the fundraising and should not fall under any of the exceptions identified above. The presentation of capitalized direct costs of fundraising will differ depending on whether the common stock is issued with a par value or without one.
Common Stock With Par Value
When common stock has a par value, this value is presented on the balance sheet under the item “Common Stock”, with any premium (a positive difference between the proceeds and the nominal value) presented as "Additional Paid in Capital". Use a separate account named "Additional Paid In-Capital - Direct transaction costs of common stock issuance"1 to record the total premium received on the sale of common stock.
If legal costs exceed the premium, record a reminder to the “Common Stock” item on the balance sheet, using a separate account titled “Common Stock - Direct Transaction Costs of Common Stock Issuance.”
If legal costs exceed the proceeds from fundraising and the total balance of the "Additional Paid in Capital" and “Common Stock” prior to capitalization of legal expenses, record a reminder to the “Retained Earnings” item on the balance sheet, using a separate account titled “Retained Earnings - Direct Transaction Costs of Common Stock Issuance.”
Common Stock With No Par Value
In situations when stocks have no par value2 (e.g., Canadian corporations), all proceeds would be recorded to the "Common Stock" account. Accordingly, when common stock has no par value, the legal costs associated with raising capital are deducted from the proceeds. These costs are recorded directly to the "Common Stock” account.
Below, we present different outcomes for the four scenarios where the only difference is the par value of one common share issued:
Based on this data, we can calculate the total par value and premium received under each scenario as follows:
Results are shown below:
After posting required journal entries as discussed above, our general ledger (G/L) accounts in the trial balance sheet should have the following balances:
For financial reporting purposes, general ledger (G/L) accounts are aggregated into individual line items within the financial statements.
Conclusion
As demonstrated above, reporting entities should carefully consider the par value amount of stock issued when accounting for the direct cost of fundraising and subsequently preparing the financial statements, as the presentation of such costs varies significantly depending on the par value of the stock issued.
We recommend using separate general ledger sub-accounts to accumulate transaction costs, as this simplifies the process of obtaining data for the statement of cash flows, where costs should be presented as a separate line item.
Note that common stock with a par value of $0.00 is not the same scenario as the common stock with no par value. The common stock with $0.00 par value would fall under the scenario “Common Stock With Par Value” above.