No par value stock definition
/What is No Par Value Stock?
No par value stock is shares that have been issued without a par value listed on the face of the stock certificate. Historically, par value used to be the price at which a company initially sold its shares. When a company has no par value stock, there is effectively no minimum baseline from which to price the stock, so the price is instead determined by the amount that investors are willing to pay, based on their perceived value of the issuing entity; this may be based on a number of factors, such as cash flows, the competitiveness of the industry, and changes in technology.
The general trend among state governments is to allow the use of no par value stock, since the practice of issuing par value stock at the absolute minimum amount has essentially eliminated the reason for having par value. Thus, we may eventually see the elimination of the par value concept as it relates to company stock.
The use of no par stock does not apply to other types of securities, such as bonds, where the par value is essentially the same as the face value of the instrument.
Advantages of No Par Value Stock
There are several significant advantages to issuing no par value stock, which are as follows:
Reduced corporate liability. There is a theoretical liability by a company to its shareholders if the market price of its stock falls below the par value for the difference between the market price of the stock and the par value. Companies set the par value as low as possible in order to avoid this theoretical liability. It is common to see par values set at $0.01 per share, which is the smallest unit of currency. Some states allow companies to issue shares with no par value at all, which eliminates the theoretical liability payable by the issuer to shareholders. If common stock has no par value, a company prints "no par value" on the face of any stock certificates that it issues. This information may also be noted in the issuer’s articles of incorporation.
Simpler accounting. When a business issues no par value stock, it no longer needs to track the par value of the shares in a separate account (since there is no par value). This eliminates one equity account, and also reduces the number of line items reported in the equity section of its balance sheet. This represents a small reduction in the accounting for equity transactions.
Easier stock splits and conversions. No par value shares simplify the process of stock splits, stock dividends, and share conversions, since there is no need to adjust the par value for these corporate actions.
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Accounting for No Par Value Stock
When a company sells no par value stock to investors, it debits cash received and credits the common stock account. If a company had instead sold common stock to investors that had a par value, then it would credit the common stock account up to the amount of the par value of the shares sold, and it would credit the additional paid-in capital account in the amount of any additional price paid by investors in excess of the par value of the stock.
Example of No Par Value Stock
ABC International sells 1,000 shares of no par value stock to investors for $10 per share. It records the transaction with this entry:
| Debit | Credit | |
| Cash | 10,000 | |
| Common Stock | 10,000 |
If ABC had instead issued the shares with a par value of $0.01, then the transaction would be recorded as:
| Debit | Credit | |
| Cash | 10,000 | |
| Common Stock | 10 | |
| Additional paid-in capital | 9,990 |
Terms Similar to No Par Value Stock
No par value stock is also known as no par stock.