Accounting for Issuance of New Shares: Ultimate Guide

The accounting treatment for the issuance of new shares depends on the market value and the form of consideration received.

Commonly, companies issue new common stocks to raise additional capital from the market. Companies without a trading stock value can also issue new shares to specific investors.

Let us discuss the accounting treatment of issuance of new shares with different examples.

How to Account for Issuance of New Shares?

A company may issue new shares at any time after approval of shares allocation from the SEC. Many quoted companies get approvals for their List A, B, or C class shares at once and issue these shares whenever they need.

Non-quoted companies can also issue new shares in exchange for cash or any other asset from new investors. The accounting treatment remains the same for types of companies.

New stocks issued should be recorded on their settlement date at fair market value. The fair value is usually the cash received by the company against issued shares. The settlement date is the date at which the transaction completes in the stock market.

Commonly, new shares at issued at above par values with a face or par value attached to the shares. The company records the proceeds as a debit to cash and credit to common stock for the par value. The excess amount is credited to the additional paid-in capital account.

New shares can be issued through future contracts as well. These contracts bind both parties to sell and buy shares at an agreed price on a specific date. Under normal circumstances, both parties cannot avoid the contract on the given date.

Types of Accounting Entries for New Shares

A company may have to record the accounting entries for the issuance and repurchase of new shares. The consideration received is normally in the form of cash.

Let us now discuss different scenarios for new shares issuance and the accounting treatment in each case.

The Sale of New Stocks on Cash

A company may issue common stocks or preferred stocks to raise capital from the market. The sale of new shares in exchange for cash is the most common scenario.

Many companies issue common shares in the stock market to generate capital. However, preferred shares or convertible securities can also be issued to specific investors in exchange for cash.

Issuance of new shares against cash can then take further scenarios depending on whether the shares have been issued at, above, or below the par value of the shares.

Issuance at Par

The par or face value of a share denotes the legal capital value of the share that is printed on the share certificate. Companies choose a fraction of a dollar as the par value of a share to avoid any legal complications. For example, a company may set $ 0.0001 as a par value of its shares.

Suppose a company ABC issues 1 million new shares to an investor at a par value of $ 0.001. The company decides to issue these shares at par value only. The purpose is to take benefit from the entrepreneurship skills of the new investor, thus requiring no additional paid-in capital.

Transaction Value = 1,000,000 × 0.001 = $ 1,000.

The accounting entry for ABC company will be:

Account	Debit	Credit
Cash	$ 1,000
Common Stock		$ 1,000

There will be no entry for the share premium or additional paid-in capital account for this transaction.

Issuance at a Premium or Discount

The most common scenario for new share issuance is selling stocks at a premium. This type of transaction is recorded through an IPO or a new shares issue at the stock market.

A company may also issue new shares through a rights issue or in the form of preferred shares to specific investors.

Suppose ABC company issues 100,000 new shares in the stock market. The par value of these shares is $ 0.001. We assume that all of these shares are subscribed by shareholders in the stock market.

Suppose the share price for this transaction is $ 18 per common share.

Total Value of the transaction = 1,00,000 × 18 = $ 1,800,000.

The journal entry for ABC company for this transaction will be:

Account	Debit	Credit
Cash	$ 1,800,000
Common Stock (at $ 0.001)		$ 100
Additional Paid-In Capital		$ 1,799,900

ABC company can record the same accounting entry for preferred shares instead of common stocks as well. The only difference will be to credit the preferred shares account instead of the common stock account.

Issuance of new shares at below par value is prohibited in most jurisdictions. However, if that is legally allowed in any jurisdiction, the resulting transaction will be as below:

Account	Debit	Credit
Cash	$ XXXX
Common Stock (at $ 0.001)		$ XXXX
Additional Paid-In Capital	$ XXXX

Note: A company can use a separate contra common stocks account in this scenario as well.

Issuance of Stocks with No Trade Value

Non-quoted and quoted companies can issue new stocks with no traded value under special circumstances. Most commonly, private companies issue new shares without a trade value to attract specific investors.

When a company issues new shares with no trade value, it has to determine the fair market value of the shares.

The US GAAP rules provide no exception to these transactions for the estimation of the fair market value of newly issued shares. The company should account for the fair market value of newly issued shares as per the guidelines of ASC 820: Fair Value Measurement.

The Sale of Common Stock in Exchange of Non-Cash Assets

A relevant case to the issuance of new shares with no trade value is the issuance of new stocks in exchange for non-cash assets.

Generally, a company issues new shares in exchange for a valuable asset such as land or services from the investor.

The first step for the issuing company is to determine the fair market value of the shares. If the shares have a trading value, then the company can use the stock price on the transaction date.

If there is no trading value for newly issued shares, the company can use the fair market value of the asset received as a consideration against shares.

Once the company determines the fair market value of the asset and shares, the accounting entry for the transaction is a simple one.

Suppose ABC Company issues 100,000 new shares at a par value of $ 0.001 and a share price of $ 15. The consideration received is the land worth $ 1.5 million.

The accounting entry for this transaction will be:

Account	Debit	Credit
Fixed Assets – Land	$ 1,500,000
Common Stock (at $ 0.001)		$ 100
Additional Paid-In Capital		$ 1,499,900

The Repurchase of Stocks – Treasury Stocks

A company can also repurchase its issued stocks. It is a relevant entry to the issuance of new stocks. The repurchased stocks are treated as treasury stocks by a company.

Suppose a company ABC repurchases its 50,000 shares trading at $ 20 per share.

The accounting entry for this transaction will be:

Account	Debit	Credit
Treasury Stocks	$ 1,000,000
Cash		$ 1,000,000

Suppose ABC company wants to permanently retire these treasury stocks. These stocks have a par value of $ 0.001 per share and were sold at $15 per share.

The accounting entry to retire these treasury stocks will be:

Account	Debit	Credit
Common Stock (at $ 0.001)	$ 50
Additional Paid-In Capital	$ 749,950
Retained Earnings	$ 250,000
Treasury Stock		$ 1,000,000

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