Some corporations issue shares of stock to investors in exchange for cash. Others issue shares of stock for other assets. Non-cash assets help the business reach its operational goals. The company can sell the asset to raise funds or use it directly in the business operation. The company needs to record the stock issuance in the financial records. Before it records this transaction, the company needs to determine an objective measurement for the dollar amount to use in the transaction.
Fair Market Value
The fair market value of assets represents the value that the owner can sell the asset for on the current date. This bears no relationship to the historical cost or the cost that the original owner paid for the asset. This value represents an independent evaluation of the asset’s worth.
Stock value can be measured in several ways. One way uses the par value of the stock and multiplies this value by the number of shares exchanged. This calculates the total par value of the transaction. Another way uses fair market value. The company determines the fair market value of shares of stock by reviewing its closing stock price. The company multiplies this value by the number of shares. This calculates the total fair market value of the transaction.
The company may use the fair market value of the consideration exchanged to determine the amount used for the transaction. The company determines this value in various ways. If the company immediately sells the asset, it determines the value from the sale price. If the company keeps the asset, it may hire an appraiser or review current selling prices for similar assets.
When the company chooses which value to use for recording the transaction, it chooses the value with the most verifiable fair market value. In many cases, the closing stock price represents the most verifiable value. If the company’s stock doesn’t trade on a stock exchange, the company often uses the appraised value of the asset. The company records the transaction in the financial records by increasing the asset account by the fair market value, increasing common stock by the par value of the stock exchanged and increasing the paid-in capital value by the difference.