What is Par value of Share?
Par value of shares also known as the stated value per share is the minimal shares value as decided by the company which is issuing such shares to the public and the companies then will not sell such type of shares to the public below the decided value. In other words it is the share nominal amount ($1, $0.1 or $0.001) mentioned on the stock certificate at the time of issuance of shares. It has no meaning and has no relation to the market value of a share.
Many years ago, if shareholders bought a share for less than par value then he/she would have the 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 now it is not permissible to have a market value of share less than its par value.
Formula
Shareholding of a company is recorded in the balance sheet as Shareholders equity.
The broad classification Shareholder’s equity is that the first one is “paid in capital” which is known as the amount invested by shareholders and the second one is “Retained Earning” which comes from Net Income of the company.
Now when a company issues shares which are having certain par value then the total book value of equity will be recorded as follows:
Where,
- Common stock at par = par value * number of shares issued
- Additional paid-in capital= 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 who got the approval for issuance of 2000 shares which has a par value of per share. If these shares were issued at $11 per share, then the transaction will be recorded below in the balance sheet:
Let’s additionally retained earning for XYZ is $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 sheet. In March 2017, DMart which is an operator of the retail chain has 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 IPO. 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 capital 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 has been issued at the time of IPO. Rest additional paid-in capital and retained earning is being clubbed into “Other Equity” row. So that’s how common stocks are shown in the balance sheet.
Shares at No Par Value
- Nowadays if not required by law, then companies may choose to issue no par value.
- That means corporations are not having any kind of legal obligations to its debt holders.
- Though the par value usually is so low that no par value also won’t provide much of the 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 price cannot go below this price.
- Earlier, par value used to be a benchmark that if the price of the share fell below par value then its shareholders are liable to its creditors of the difference between share price and par value. So low par value helps avoid a company contingent liability.
Disadvantage
- Par value is just a notional number which doesn’t say anything about the market value of shares.
Limitations
- Par values of the bond is an important concept, but the par value usually is so low that its effect on a book value of equity is negligible.
- It rarely affects stock holding or market price of a share.
Important Points to Note
- Before raising capital, a corporation owner must be aware of par value though it doesn’t affect the book value of market value by much.
- By seeing the par value we should never assume about book or market value of equity since it doesn’t indicate a perfect picture of the same.
Recommended Articles
This has been a guide to what is Par Value of Share and its definition. Here we discuss the par value of share formula, its calculation along with practical examples. We also discuss its advantages & disadvantages. You can also learn more about accounting from the following articles –
