Treatment of Underwriting Commission in Cash Flow Statement
Confused, What is the accounting treatment of the Underwriting Commission in the Cash Flow Statement.
What is Underwriting Commission
Underwriting is an agreement whereby the underwriters undertake to subscribe to unsubscribed shares and/or debentures offered to the public.
For undertaking to subscribe to the unsubscribed share and/or debentures, the underwriters charge commission usually calculated on the issue price of shares and debentures.
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Payment of underwriting commission is shown as an outflow of cash under financing activites.
It should not be noted that Underwriting Commission is written off in the Financial Statements from Securities Premium Reserve if it exists or from Statement of Profit and Loss.
When Securities Premium Reserve is not given in Question
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In this case, Underwriting Commission is added to Net Profit before tax and Extraordinary Items to calculate Cash flow from operating activities.
Further, it is subtracted as outflow under Financing Activity.
When Securities Premium Reserve is given in Question
Let’s understand in two cases.
Case – I
When securities Premium Reserve is less than the Underwriting Commission.
Let’s say, Underwriting commission is ₹ 5000 and Securities premium Reserve is ₹ 3000.
In this case, the Underwriting Commission of up to ₹ 3,000 is written off against Securities Premium Reserve. The remaining ₹ 2000 would be written off from the Profit and Loss Account.
In this case, Underwriting Commission ₹ 2,000 is added to Net Profit Before Tax and Extraordinary Items to calculate Cash flow from operating activities.
Securities Premium Reserve ₹ 3,000 is added and the Underwriting Commission of ₹ 5000 is subtracted from financing activities.
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Case – 2
When securities Premium Reserve is more than the Underwriting Commission.
Let’s say, Underwriting commission is ₹ 3000 and Securities Premium Reserve ₹ 7000.
In this case, the whole amount of Underwriting Commission ₹ 3000 is written off against Securities Premium Reserve.
In this case, no amount of underwriting commission is added to Net Profit Before Tax and Extraordinary Items to calculate Cash flow from operating activities.
Securities Premium Reserve ₹ (7000 – 3000) is added and underwriting commission ₹ 3000 is subtracted under Financing activities as cash outflow
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