What is Stated Value Stock?

//What is Stated Value Stock?
What is Stated Value Stock? 2017-10-10T07:30:10+00:00

Definition: Stated value stock is no-par stock that is assigned a value at issuance for accounting purposes. In other words, it’s a share of stock that isn’t assigned a par value by the corporate charter. When the share is issued to the owner, management assigns its value, so the accounting department can record the transaction. The state value has nothing to do with the fair market value. This is simply the dollar value that management assigned to the shares in order to record the business transaction in the accounting system.

What Does Stated Value Stock Mean?

Many companies choose not to establish a par value in their charters because it allows them to escape the minimum legal capital requirements that many states have. Since most states’ laws refer to a par value when determining the minimum capitalization thresholds, corporations are able to side step this issue by creating no-par value stock.

Many states have caught on to this strategy, however, and now require companies to use the stated value as the new minimum capital limits. This is a step in the right direction, but management can still manipulate this to a lesser degree by setting an artificially low value.

Let’s look at an example of how the issuance of these shares is recorded.

Example

When Tom incorporates his business, he decides to not include a par value in the corporate charter. Instead, he issues 1,000 shares to himself with a stated value of $1 per share for $500,000. When the company issues the shares to Tom, the common stockaccount is credited for $1,000, the cash account is debited for $500,000, and the additional paid in capital account is credited for $499,000.

Notice the stated-value does not reflect the fair market value or the actual amount paid for the shares. In this way, it is similar to par value shares.