Change in Par Value: Everything You Need to Know
The par value is typically listed on stock certificates and usually does not represent the stock's actual value.3 min read
A change in par value usually occurs when a company's stock is split. The par value is typically listed on stock certificates and usually does not represent the stock's actual value.
What is Par Value
The per share amount of company stock is the par value. You can usually find the par value listed on bond and stock certificates. The par value of common stock is typically small. Par value of stock shares is not connected to the stock's market value. Par value is best considered as the legal capital of common stock and is a part of a company's contributed capital.
For example, imagine that your company issues a common stock share for $25, and the par value of the stock is $0.10. You would credit your Common Stock account for $0.10 and your contributed capital account for $24.90. Corporations can issue no-par stocks if they are not legally required to issue common stock with a par value. No-par stocks do not require a stated value. The par value of a bond will either be its face value or its value upon maturation.
Bonds and Par Value
Par value is one of the most important bond characteristics. With a bond, the par value is the amount that the issuer will pay to the bond owner once the bond matures.
While most bonds are issued at their par value, this is not necessarily a requirement. Depending on the economy's current interest rates, a bond can get issued at a discount or a premium. When bonds are traded above their par value, this is known as a premium. A discount is when a bond is traded below its par value. When interest rates are low, bonds usually get traded at a premium, and when these rates are high, bonds get traded at a discount.
Par Value of Stocks
The reason that the par value of stocks is very low is that many states prevent companies from selling stocks for less than their par value. Setting the par value low guarantees the company is able to comply with these rules.
When a company initially offers its stock publicly, they cannot sell shares under their par value, ensuring that no one investor gets more favorable treatment than other investors in terms of share prices. In states where stocks do not have to have a par value, companies can sell their stocks at any price. Stock certificates will indicate whether a stock does or does not have a par value.
Accounting for a Change in Par Value
A stock's par value is its stated value, not its actual value. When a stock sells, it will be issued at its actual value and not the stated par value. The most common reason for a change in par value is a stock split. During a split, the total par value will actually remain unchanged. The individual par value, however, will be cut in half in a standard two-for-one stock split.
Companies can account for a change in par value by following a few steps:
- Check the company's books to determine the par value of the stock.
- Examine the type of stock split. A normal two-for-one stock split means that the company's outstanding shares will be double.
- Determine the new par value. If the company had 1,000 shares and the par value of these shares was $10, there would be 2,000 shares and a par value of $5 after a two-for-one split.
It's important to remember that the total par value remains unchanged after a stock split. So, if the total par value pre-split was $10,000 (1,000 shares and a par value of $10 per share), the total par value would still be $10,000 after the split (2,000 shares and a par value of $5 per share).
When the individual par value changes after a stock split, you should record this change in your accounting records by using a memorandum notation. Because the there was no actual change in the financial amount, you will not need to make a journal entry. The purpose of the notation is to allow investors to see how the split took place and the change in the individual par value.
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