Key Takeaways

  • Par value is a nominal, legally stated amount on stock certificates, distinct from market value.
  • Stock splits do not change the total par value of stock issued; they only adjust the individual par value per share.
  • In a stock split, the number of shares increases while the per-share par value decreases proportionately.
  • Reverse stock splits reduce the number of outstanding shares and increase individual par value accordingly.
  • No journal entry is typically required for a par value change due to a split—only a memorandum notation in accounting records.

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 can 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 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.

Understanding Reverse Stock Splits and Par Value

In a reverse stock split, a company reduces the number of its outstanding shares, increasing the par value per share proportionally. For instance, in a one-for-five reverse split, every five shares are consolidated into one, and the par value per share increases fivefold. Despite this change, the total par value and overall shareholders’ equity remain the same.

This method is often used to increase the stock price or comply with listing requirements. For example, if a company had 5,000,000 shares at a $0.01 par value before the split, it would have 1,000,000 shares at a $0.05 par value after a one-for-five reverse split. The total par value would still equal $50,000.

Reverse splits can impact how par value is presented in financial statements, sometimes requiring adjustments to stated capital accounts while maintaining compliance with state corporate laws. Like forward splits, reverse splits do not require journal entries when there is no change in the overall value, but clear disclosures and memorandum notes are essential for transparency.

How Stock Splits Affect Financial Statements

Although stock splits change the number of outstanding shares and the par value per share, they do not alter the overall value recorded in shareholder equity. The most significant effect of a stock split is on the share structure—not on earnings, assets, or liabilities.

In financial reporting:

  • Common Stock Account: The balance remains consistent in total, but the number of shares and par value per share are adjusted accordingly.
  • Additional Paid-In Capital (APIC): This account may be updated to reflect any historical cost basis related to shares, but not directly from a par value adjustment.
  • Disclosure: Companies typically disclose details of stock splits, including the change in share count and new par value, in the notes to their financial statements.

These adjustments help maintain consistency in financial reporting and ensure investors understand the changes in share structure.

Frequently Asked Questions

1. Does par value change in a stock split? 

Yes, the individual par value per share changes proportionally to the number of new shares issued, but the total par value remains the same.

2. What happens to the accounting records in a stock split? 

No journal entries are made for stock splits. Instead, memorandum entries reflect changes in the number of shares and par value per share.

3. Is par value related to a stock's market value? 

No. Par value is a nominal value set by the company for legal and accounting purposes and does not reflect the stock’s trading price.

4. Why do companies perform reverse stock splits?

 Companies often do this to increase share price, meet exchange listing requirements, or improve the perceived value of the stock.

5. Can a company issue shares without a par value?

 Yes. In jurisdictions that allow it, companies may issue no-par stock, removing the requirement to assign a minimum issue price.

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