Recording the investment before share issue

Client only issued the shares after the year end, but received the funds before

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Tech start up client is raising equity capital, and has received most of the share capital investments before the year end.

However, the process of issuing and allocating the shares was only done after the year end, once the company received funds from all committed investors.

They have share agreements in place with all investors, committing for x amount shares against the funding. The share issue and full allocation was finally completed after the year within around 45 days.

My question is how do we recognise these investments at the year end?  Recognising as loan creditor would show a poor state of Balance Sheet with a large creditor balance/deficit, which the client wants to avoid.

Is there a way to reflect these funds are share capital in the YE accounts ( though the filings were not done)?

 

Thank you

 

 

 

Replies (6)

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John Toon profile picture
By John Toon
19th Jun 2024 11:34

Hard to say without more detail but if the shares weren't issued until after the cash was received then they are essentially loans (I guess it depends on what would have happened with the cash received if the funding round hadn't met it's target?)

Alternatively you could make a vague argument for some form of capital contribution which would sit in equity.

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By Andy55
19th Jun 2024 11:40

I'm struggling to see how showing this as a loan gives a deficit. Surely it just balances the cash in bank?

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By paul.benny
19th Jun 2024 14:08

Apart from the obvious question of didn't they think about this beforehand (clearly not), what does the share subscription agreement say?

It seems to me that if the subscription was irrevocable, funds were received before year end, and the subscription period closed before year end , then you can potentially treat the shares as issued. The rest is just admin.

Lots of detail that might change that view - such as if allocations were not fixed, or were dependent on all parties committing. I'd also be looking at what the investors were expecting. Have they been shown pro-forma balance sheets?

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By Ruddles
19th Jun 2024 15:06

Extend the ARD by ~45 days (and then shorten it).

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Replying to Ruddles:
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By Paul Crowley
19th Jun 2024 15:39

Probably the easiest thing to do if it is that important.
But it will not change the loss that has been incurred, it could make it look worse.

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By Leo01
19th Jun 2024 16:21

Thank you for all your comments. Extending the year end sounds like good plan ( though it may cause an inconstancy with the accounts).
The company made large losses from R&D etc. The capitalisation will not change the P&L loss, but it will move the creditor balance to share capital, resulting in a positive shareholders funds total in BS.

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