How are stock-related costs treated under the acquisition method?

Under the acquisition method of accounting, stock-related costs are treated as a reduction in the value of stock issued. This means that when a company incurs costs directly tied to the issuance of its stock, such as underwriting fees or legal expenses, these costs are not recorded as expenses on the income statement but rather reduce the overall value of the equity issued.

When stock is issued, it is recorded at its fair value, and any direct costs associated with the issuance decrease the proceeds from the stock issuance, effectively lowering the additional paid-in capital. This treatment reflects the principle that costs incurred to facilitate financing should be offset against the amounts raised through that financing.

Other treatment options, such as recognizing these costs as an expense, would distort the true value of the equity capital raised since they are more akin to transaction costs rather than operational expenses. Similarly, treating them as an increase to retained earnings or as an intangible asset would misclassify the nature of these costs in financial reporting. Hence, recognizing stock-related costs as a reduction in the value of the stock issued appropriately aligns with generally accepted accounting principles.