No-Par-Value Stock Overview, Reasons for Issuing It, Accounting Entry

One of the only circumstances shareholders may be impacted by par value is if the issuing company goes bankrupt and the shareholder acquired the shares of stock for below par value. In this rare circumstance, debtors can legally pursue these shareholders for the difference between what they paid for the shares and the par value. No par value shares are a type of corporate stock that does not have a designated face value or stated minimum value.

The par value for a bond is often $1,000 or $100, the usual denominations in which they are issued. No-par value stocks are printed with no face value designation, while low-par value stocks may show an amount lower than $0.01, all the way up to a few dollars. https://online-accounting.net/ Many times, when a smaller company seeks to lower the number of its shareholders, it may choose to issue stocks with a face value of $1.00. If a stock has no-par value, a company has not assigned a minimum value for its stock (often at the time of issuance).

Reasons for Issuing No-Par-Value Stocks

This “no-par” status means that the company has not assigned a minimum value to its stock. No-par value stocks do not carry the theoretical liabilities of par value issues since there is no baseline value per share. However, since companies assign minimal par values if they must, there’s little effective difference between a par stock and a no-par stock. Therefore, the par value multiplied by the total number of shares issued is the minimum amount of capital that will be generated if the company sells all the shares. The par value was printed on the front of the old version, paper stock certificate and is often available in digital form today.

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University. Notably, par value for a bond is different, referring to its face value, or full value at maturity.

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Par value is the face value of a bond or the value of a stock certificate stated in the corporate charter. A stock’s par value is often unrelated to the actual value of its shares trading on the stock market. Par value is required for a bond or a fixed-income instrument and defines its maturity value and the value of its required coupon payments. In case the company issues 150 no-par-value stocks, the accounting entry is a debit of $3,000 to a cash account and a credit of $3,000 to a common stock account.

These are often called minimum legal capital laws because the corporation is requires to maintain a minimum about of net assets at all times. If the coupon rate equals the interest rate, the bond will trade at its par value. If interest rates rise, the price of a lower-coupon bond must decline to offer the same yield to investors, causing it to trade below its par value. If interest rates fall, then the price of a higher-coupon bond will rise and trade above its par value since its coupon rate is more attractive. Often, the decision to issue no par value stock is indicated in the company’s Articles of Incorporation or indicated on the stock certificate itself.

What Is a Stated Value?

A bond with a face value of $1,000 trading at $1,020 is trading at a premium, while another bond trading at $950 is considered a discount bond. Whether a bond is trading at a discount or premium, the issuer always repays the par value to the investor at maturity. Par value used to be the price that the company had originally valued their shares when they were first sold. This is because par value is the nominal value at which the stock can be redeemed. Because it is generally illegal for a company to pay dividends or repurchase shares if doing so impairs the legal capital, the stated value helps to provide shareholders with some protection. However, in practice, with the stated value per share as low as one penny, monetary interest is modest or de minimus.

Instead of assigning a fixed value per share, these shares represent ownership in the company without a specific monetary value attached, allowing for greater flexibility in pricing and trading. If a 4% coupon bond is issued when temporary accounts market interest rates are 4%, the bond is considered trading at par value since both market interest and coupon rates are equal. Bonds can trade at a premium or a discount depending on the level of interest rates in the economy.

• The only financial effect of a no-par value issuance is that any equity funding generated by the sale of no-par value stock is credited to the common stock account.
• Some states allow companies to issue shares with no par value at all, which eliminates the theoretical liability payable by the issuer to shareholders.
• The company must indicate the share’s no-par value on the stock certificate or within its articles of incorporation.
• This is extremely important for fixed-income securities such as bonds where the interest payment on preferred shares is based on a percentage of the par.

In theory, a company can be liable for the difference if the market price of a stock drops below the par value printed on the face of its stock certificates. Companies set par values as low as possible to avoid this potential liability. Some states allow companies to issue shares with par values set at fractions of a penny, or even at no par value at all. Without a par value printed on the face of the stock certificate, the potential liability to shareholders if the market price falls below par value is eliminated.

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When it does not assign a base value or par value, it results in a no-par-value stock. The par value of a stock may have become a historical oddity, but the same is not true for bonds. Bonds are fixed-income securities issued by corporations and government bodies to raise capital.

No-Par Value Stock: Meaning and Use Cases

The intent behind the par value concept was that prospective investors could be assured that an issuing company would not issue shares at a price below the par value. By setting the par value at the lowest possible unit of currency, a company avoids any trouble with future stock sales if its shares begin to sell in the penny stock range. Many states consider the par value concept to be outmoded, and so allow shares to be sold with no par value. Companies issue shares of stock to raise equity, and those that issue par value stocks often do at a value inconsistent with the actual market value. This adjustment allows companies to minimize their and the shareholders’ contractual obligations, as par value carries a binding contract between an organization and its shareholders.

Be sure to check with your financial advisor or other financial professional before purchasing any instrument that comes with a risk of loss. Depending on the business size and level of assets, not having to meet a minimum capital level could open up different opportunities and production capacities that it wouldn’t have been able to afford otherwise. The terms “par value” and “face value” are interchangeable and refer to the stated value of a financial instrument at the time it is issued. Since pricing fluctuates with the market, an investor is often not concerned with the face value amount of the stock but what it is worth currently on the market. Sometimes having a par value listed on the stock that is significantly different than it trades on the market may make it a less attractive option for those issuing the stock.

In most cases, the par value of the stock today is little more than an accounting concern, and a relatively minor one at that. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. CFI is the official provider of the Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

This means that during unprofitable years or years of expansion enough assets must be maintained, so that the investors stock are still protected on a capital basis. The minimum capital requirements are usually set based on the par value stated in the corporate charter. The par value of shares, or the stated value per share, is the lowest legal price for which a company sells its shares. With the high benefits of issuing no par stock, state governments are becoming more accepting of no par stock trends. The acceptance of no par stock issuance with companies, as well as government agencies, is making it a more common practice and is beginning to eliminate the necessity of having par value stock. It is important to note that the use of no par stock is not accepted with types of securities, such as bonds, as the par value is the same as the face value of the instrument.