Paid in capital in excess of par, also known as additional paid-in capital (APIC) or capital surplus, represents the amount of money shareholders have paid for shares of stock above their stated par value. This component is a crucial part of a company's shareholders' equity on the balance sheet, reflecting the portion of equity financing received from investors that exceeds the arbitrary legal par value assigned to the shares. It falls under the broader category of accounting and corporate finance.
History and Origin
The concept of par value in stock originated centuries ago, primarily to protect creditors by ensuring a minimum amount of capital was available to a company. Early corporate laws mandated that shares could not be issued for less than their par value. If shares were issued below par, shareholders could be held liable for the difference, creating a legal capital cushion. As companies evolved and the market value of shares became disconnected from their often nominal par values, the need arose to account for the actual cash or consideration received by the company beyond this arbitrary minimum. This led to the creation of "paid in capital in excess of par" to record the premium paid by investors. While some states, notably Delaware, have legislated significant changes regarding par value, including allowing for "no par value" stock, the historical accounting distinction remains relevant for many corporations, particularly those incorporated in jurisdictions that still utilize par value. The legal framework surrounding par value aimed to ensure a minimum amount of equity remained with the company, preventing early distribution of all capital as dividends.10 A 2019 academic paper outlines the historical context and legal developments surrounding par value in Delaware corporate law.
Key Takeaways
- Paid in capital in excess of par is the amount investors pay for shares above their par value.
- It is a component of shareholders' equity on a company's financial statements.
- This account reflects the premium received during the issuance of stock.
- It is often synonymous with Additional Paid-in Capital (APIC) or capital surplus.
- The existence of this account is tied to the concept of par value, which is often a nominal amount set for legal reasons rather than economic significance.
Formula and Calculation
Paid in capital in excess of par is calculated as the difference between the actual issue price of a share and its par value, multiplied by the number of shares issued.
Where:
- Issue Price Per Share is the price at which the company sells each share to investors.
- Par Value Per Share is the nominal or stated value assigned to each share by the company's charter.
- Number of Shares Issued refers to the total count of common stock or preferred stock sold to investors.
For instance, if a company issues 1,000 shares with a par value of $1 each for an issue price of $10 per share, the paid in capital in excess of par would be $($10 - $1) \times 1,000 = $9,000$.
Interpreting the Paid in Capital in Excess of Par
Paid in capital in excess of par is primarily an accounting entry that reflects how a company’s initial equity was structured, rather than an indicator of its operational performance or current financial health. A higher amount typically suggests that the company's shares were issued at a significant premium over their nominal par value, which is common given that par values are often set very low (e.g., $0.01 or $0.001) for legal purposes.
Investors and analysts typically review this account as part of the broader shareholders' equity section on a company's financial statements to understand the composition of the capital contributed by owners. It indicates the amount of cash or other assets contributed by shareholders beyond what is legally designated as stated capital (the par value component). While a substantial amount of paid in capital in excess of par shows that a company has raised significant capital through equity financing, it does not directly impact cash flow or profitability. It's a static figure that changes only when a company issues new shares or engages in certain capital restructuring activities.
Hypothetical Example
Imagine "InnovateTech Inc." is a startup looking to raise capital.
- InnovateTech Inc. decides to issue 1,000,000 shares of common stock.
- The company's board sets the par value per share at a nominal $0.01.
- Through an Initial Public Offering (IPO), InnovateTech successfully sells all 1,000,000 shares to investors at an issue price of $20 per share.
To calculate the paid in capital in excess of par:
- Total proceeds from issuance = $20 (issue price) $\times$ 1,000,000 (shares) = $20,000,000
- Total par value of shares issued = $0.01 (par value) $\times$ 1,000,000 (shares) = $10,000
- Paid in capital in excess of par = Total proceeds - Total par value = $20,000,000 - $10,000 = $19,990,000
On InnovateTech's balance sheet, the shareholders' equity section would reflect:
- Common Stock (at par value): $10,000
- Paid in Capital in Excess of Par: $19,990,000
- Total Contributed Capital: $20,000,000
This example clearly demonstrates how the vast majority of the capital raised from investors in this scenario is recorded as paid in capital in excess of par due to the low nominal par value.
Practical Applications
Paid in capital in excess of par is a standard component of corporate accounting, found on the balance sheet under the shareholders' equity section. It is specifically reported by publicly traded companies in their regulatory filings, such as Form 10-K, submitted to the Securities and Exchange Commission (SEC). This account's primary role is to accurately classify the sources of a company's equity capital according to Generally Accepted Accounting Principles (GAAP).
For example, looking at the 2023 Form 10-K for Apple Inc., the "Total Shareholders' Equity" section provides a breakdown of equity components, including "Common stock and additional paid-in capital." T7, 8, 9he SEC's Division of Corporation Finance plays a role in ensuring that companies provide sufficient and accurate disclosures about their financial structure, including the components of shareholders' equity, to protect investors and maintain transparent capital markets. T4, 5, 6his ensures that potential investors have clear insights into how a company has raised its capital.
Limitations and Criticisms
The primary criticism of "paid in capital in excess of par" and the underlying concept of par value itself is its largely arbitrary and historical nature in modern corporate finance. I3n many jurisdictions, par value is set at a minimal amount (e.g., $0.01 or less) primarily to avoid legal complications related to issuing stock below par, rather than reflecting any intrinsic book value or economic reality of the share. This makes the "par value" component of equity largely insignificant, with the vast majority of contributed capital flowing into the "paid in capital in excess of par" account.
The historical rationale for par value, which was to protect creditors by ensuring a minimum amount of equity remained in the corporation, has diminished in practical importance. Modern legal and accounting standards provide more robust mechanisms for creditor protection and capital maintenance. Consequently, some states, notably Delaware (a popular jurisdiction for corporate incorporation), have introduced legislative changes that reduce the relevance of par value or allow for shares without par value. For instance, recent amendments to Delaware corporate law have further minimized the practical implications of par value, illustrating a trend towards simplifying corporate capital structures and reducing the reliance on this historical concept. T2his ongoing discussion highlights that while "paid in capital in excess of par" is a required accounting entry, its economic significance is often limited by the nominal nature of par value.
1## Paid in Capital in Excess of Par vs. Common Stock
While both "paid in capital in excess of par" and "common stock" are components of shareholders' equity, they represent distinct aspects of the capital contributed by investors.
| Feature | Paid in Capital in Excess of Par | Common Stock |
|---|---|---|
| Definition | The amount paid by investors for shares above their par value. | The aggregate par value (or stated value) of all shares issued. |
| Purpose | Records the premium received from share issuance. | Represents the minimum legal capital assigned to shares. |
| Calculation | (Issue Price - Par Value) $\times$ Number of Shares Issued | Par Value $\times$ Number of Shares Issued |
| Significance | Often reflects the majority of capital raised from investors. | Typically a nominal amount with limited economic significance today. |
| Changes | Increases with new share issuances at a premium; decreases with certain capital reductions. | Increases with new share issuances; generally static otherwise. |
The key difference lies in their reflection of the par value. Common stock (or stated capital) accounts for the par value portion, while paid in capital in excess of par accounts for the premium received above that nominal amount. Together, they form the total contributed capital from shareholders.
FAQs
What is the difference between par value and paid in capital in excess of par?
Par value is a nominal, legally assigned value per share, often very low (e.g., $0.01). Paid in capital in excess of par is the additional amount investors pay above that par value when they purchase shares directly from the company.
Why do companies have paid in capital in excess of par?
Companies have this account to accurately record the total capital received from investors for their shares, distinguishing the nominal par value portion from the premium paid. This is a requirement under Generally Accepted Accounting Principles (GAAP) for companies that issue par value stock.
Is paid in capital in excess of par considered owners' equity?
Yes, paid in capital in excess of par is a component of owners' or shareholders' equity. It represents capital directly contributed by shareholders, along with common stock and retained earnings.
Does paid in capital in excess of par affect a company's profits?
No, paid in capital in excess of par is a capital account and does not directly affect a company's profits or losses reported on the income statement. It's part of the financing section on the balance sheet, showing how capital was raised, not how it was used to generate revenue.