Definition
Shares Issued at a Discount refers to the issuance of shares by a company at a price lower than their par or nominal value. The par value represents the face value of the share, which is set by the issuing company, whereas the issue price is the actual price at which the shares are offered to investors. The difference between the par value and the issue price constitutes the discount. This practice is illegal in some jurisdictions, such as the United Kingdom.
Key Points:
- Par Value: The nominal or face value of a share as stated in the charter of the company.
- Issue Price: The price at which shares are offered to the public.
- Discount: The difference between the par value and issue price.
Examples
Illustration 1:
A company issues shares with a par value of £10 each. If these shares are issued at £8, the discount per share is £2.
Illustration 2:
A tech startup issues shares with a par value of $5 each at an issue price of $3 each. The discount in this case is $2 per share.
Illustration 3:
A financial firm launches shares with a par value of €15 but sells them at €12 each. The discount per share here is €3.
Frequently Asked Questions
Q1: Why are shares sometimes issued at a discount? A1: Companies may issue shares at a discount to attract investors quickly, especially if they are in urgent need of capital.
Q2: Is issuing shares at a discount legal everywhere? A2: No, the legality varies by jurisdiction. For instance, it is illegal to issue shares at a discount in the United Kingdom.
Q3: What are the risks associated with issuing shares at a discount? A3: Issuing shares at a discount can significantly dilute the value of existing shares and may signal financial distress to potential investors.
Q4: Are there any exceptions to the rule against issuing shares at a discount? A4: Some jurisdictions allow issuing shares at a discount under specific circumstances, often requiring regulatory approval.
Q5: How is the discount from issued shares accounted for in financial statements? A5: The discount is usually recorded as a debit to the share capital account or a separate discount on issue of shares account, reducing the overall equity of the company.
Related Terms
- Par Value: The nominal value stated on a share certificate or indicated in the company’s founding documents.
- Share Premium: The amount received by a company over and above the par value of its shares.
- Authorized Share Capital: The maximum amount of share capital that a company is authorized to issue to shareholders as per its corporate charter.
- Paid-Up Capital: The amount of money a company has received from shareholders in exchange for shares of stock, which is paid in full.
Online References
Suggested Books for Further Studies
- “Accounting for Non-Accountants: The Fast and Easy Way to Learn the Basics” by Wayne Label
- “Financial Accounting: An Introduction” by Pauline Weetman
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
Accounting Basics: “Shares Issued at a Discount” Fundamentals Quiz
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