IPO Underwriting — Firm Commitment Deal (Buy and Resell to Public)
Recording an IPO underwriting transaction where the broker-dealer buys all shares from the issuer at the public offering price less the underwriting discount, then resells to the public — bearing full price risk between purchase and sale.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Securities Owned — IPO Shares (Bought from Issuer at Net Price) | Asset (+) | 194,250,000.00 | - |
| Cash / Payable to Issuer (Net Proceeds Remitted) | Asset (-) / Liability (+) | - | 194,250,000.00 |
| Cash Received (Retail / Institutional Investor Purchases at Offer Price) | Asset (+) | 200,000,000.00 | - |
| Underwriting Revenue (Gross Spread — $5.75M per $200M deal = 2.875%) | Revenue (+) | - | 5,750,000.00 |
| Securities Owned — IPO Shares (Resold) | Asset (-) | - | 194,250,000.00 |
💡 Accountant's Note
In a firm commitment underwriting, the underwriter purchases ALL shares from the issuer at a negotiated discount to the public offering price ('the spread') and immediately resells them to investors. The underwriter bears the full price risk of unsold inventory. For a $200M IPO at $20/share with a 3% gross spread: the issuer receives $194.25M (97% × $200M); the underwriting syndicate earns $5.75M spread (3%). The gross spread is typically divided: 20% management fee (to lead bookrunner), 20% underwriting fee (to syndicate members pro-rata to their commitment), 60% selling concession (to whoever places the shares). Revenue is recognized at the point-in-time the shares are sold to investors (trade date of the IPO) — a point-in-time performance obligation under ASC 606. The lead bookrunner's role (roadshow management, order book building, price setting) has already been performed before closing.
Practitioner & Systems Framework
💻 ERP Architecture
Underwriting revenue is tracked at the deal level in the investment banking revenue system. The gross spread earned by the lead underwriter is recognized on the IPO pricing/closing date. For syndicated deals, each syndicate member recognizes only its allocated portion of the spread (its underwriting commitment percentage). The shares are typically sold before the accounts are settled — there may be a brief period (T+2 settlement) where the IPO shares appear as inventory. The lead bookrunner often retains a stabilization position (see greenshoe entry) — these shares remain in inventory after the IPO.
⚠️ Audit Flags
Auditors test that underwriting revenue is recognized at the correct point (pricing/closing date, not at mandate signing or filing of the S-1). The gross spread allocation between the three tranches (management, underwriting, selling) must reconcile to the syndicate agreement. For deals where the firm retains inventory (unsold shares, stabilization position), those positions must be marked to market immediately. Clawback provisions (if the IPO breaks the offer price, requiring the underwriter to refund selling concessions to dealers) create a contingent liability.
📄 Required Documentation
Underwriting agreement (gross spread, syndicate commitments, stabilization provisions), deal closing documents, syndicate settlement statements, gross spread allocation by tranche, final prospectus with offering price and share count, inventory position after closing (unsold shares, if any), and stabilization position register.
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