What is the Par value of a Share?

Many years ago, if shareholders bought a share for less than par value, then they would have an obligation to creditors of a corporation of the difference between the par value and value in which shares have been bought. This is not the case today since it is not permissible to have a market value of a share less than its par value.

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Formula

Shareholding of a company is recorded in the balance sheet as Shareholders equityBalance Sheet As Shareholders EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders’ Equity Statement on the balance sheet details the change in the value of shareholder’s equity from the beginning to the end of an accounting period.read more.

The broad classification of Shareholder’s equity is that the first one is “paid in capitalPaid In CapitalPaid in Capital is the capital amount that a Company receives from investors in exchange for the stock sold in the primary market, including common or preferred stock. This considers the sale of stock that an issuer directly sells to the investor & not the sale of stock on the secondary market between investors. read more,” which is known as the amount invested by shareholders, and the second one is “Retained EarningsRetained EarningRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more,” which comes from the Net Income of the company.

Now when a company issues shares which are having a certain par value, then the total book value of equity will be recorded as follows:

Where,

  • Common stockCommon StockCommon stocks are the number of shares of a company and are found in the balance sheet. It is calculated by subtracting retained earnings from total equity.read more at par = par value * number of shares issuedAdditional paid-in capitalAdditional Paid-in CapitalAdditional paid-in capital or capital surplus is the company’s excess amount received over and above the par value of shares from the investors during an IPO. It is the profit a company gets when it issues the stock for the first time in the open market.read more= number of shares* (amount at which shares issued – par value)Retained earning = Net Income – dividend

Calculation with Examples

Let’s see some examples.

Example #1

To illustrate the example of equity in a balance sheet, let us consider XYZ corporation, which got the approval for the issuance of 2000 shares, which has a par value per share. If these shares were issued at $11 per share, then the transaction will be recorded below in the balance sheet:

In addition, retained earnings for XYZ are $5,000. Then the total book value of equity will be recorded as

Book value of equity = $20,000 +$2,000+$5,000 =$27,000

Example #2

Let’s illustrate the example and issuance of shares’ effect on the balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more. In March 2017, DMart, a retail chain operator, completed its IPO. It had issued 62,541,806 equity shares with a face value of INR 10 each, but the issuance price of the share was INR 299 per share. That means it has received 62,541,806*299 = INR 187,00 million from IPOIPOAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more. So below would change in its accounts:

Let’s examine below the screenshot of the balance sheet of D-Mart:

In this balance sheet, in the Equity column, two components are mentioned: first is equity share capitalEquity Share CapitalShare capital refers to the funds raised by an organization by issuing the company’s initial public offerings, common shares or preference stocks to the public. It appears as the owner’s or shareholders’ equity on the corporate balance sheet’s liability side.read more, which has changed from 5615.4 million to 6240.7 million from 2016 to 2017. That means change is around 625.4 million. This change is attributed to the value of the common stock at par, which was issued at the time of IPO. Rest additional paid-in capital and retained earnings are being clubbed into the “Other Equity” row. So that’s how common stocks are shown on the balance sheet.

Shares at No Par Value

  • Nowadays, companies may choose to issue no par value if not required by law.That means corporations are not having any legal obligations to their debt holders.The par value is usually so low that no par value also won’t provide much difference.

Advantages

  • Par Value is an important term for any small business owner to understand before opening a corporation.It provides a benchmark that stock prices cannot go below this price.Earlier, par value used to be a benchmark that if the share price fell below par value, its shareholders are liable to its creditors for the difference between share price and par value. So low par value helps avoid a company’s contingent liabilityCompany Contingent LiabilityContingent Liabilities are the potential liabilities of the company that may arise at some future date as a result of a contingent event that is beyond the company’s control. read more.

Disadvantage

  • Par value is a notional number that doesn’t say anything about the market value of shares.

Limitations

  • Par values of the bond are an important concept, but the par value usually is so low that its effect on a book value of equityBook Value Of EquityThe book value of equity reflects the fund that belongs to the equity shareholders and is available for distribution to the shareholders. It is computed as the net amount remaining after deducting all of the company’s liabilities from its total assets.read more is negligible.It rarely affects stock holding or the market price of a share.

Important Points to Note

This has been a guide to what is Par Value of Share and its definition. Here we discuss the par value of the sharing formula, its calculation, and practical examples. We also discuss its advantages & disadvantages. You can also learn more about accounting from the following articles –

  • Shares IssuedWhat is Vesting of Shares?Shares Premium DefinitionClass A Shares