Bonds have a par value, of course – it's just the principal amount. However, stocks can also have a par value. Below, you'll learn what that par value represents and how to calculate the company's par value of common stock for the purpose of financial accounting.
Source: Downingsf. Re-published under a Creative Commons license.
What is par value?
The par value of a common share is an arbitrary value assigned to shares in order to fulfill state requirements. The par value is unrelated to the price at which the shares are first issued or their market price once they begin trading.
The par value is stated in the company's articles of incorporation and figures on the paper stock certificates that companies used to issue.
Why is the par value of shares so low?
Towards the high end of the range, AT&T's par value is $1 per common share; by contrast, Apple has a par value of $0.00001 per share (that's a thousandth of a penny.)
Companies like to set a very low par value because it represents their legal capital, which must remain invested in the company and cannot be distributed to shareholders. Another reason for setting a low par value is that when a company issues shares, it cannot sell them to investors at less than par value.
How does one calculate the par value of issued shares for the purposes of financial reporting?
You need two numbers to calculate a company's par value of issued shares: (1.) the par value per share, and (2.) the number of shares that have been issued. The par value of common stock for the company is simply:
Par value of common stock = (Par value per share) x (Number of issued shares)
The par value of issued shares often appears on the balance sheet as a line item named 'Common stock'. This is the stockholders' equity section of the ATT's 2014 year-end balance sheet:
In this case:
Par value of common stock = $1 x 6,495,231,088 = $6,495,231,088
On AT&T's balance sheet, that number shows up as '6,495' because all figures are expressed in millions of dollars.
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