Common stock should be recognized on its settlement date (i.e., the date the proceeds are received and the shares are issued). Upon issuance, common stock is generally recorded at its fair value, which is typically the amount of proceeds received. Those proceeds are allocated first to the par value of the shares (if any), with any excess over par value allocated to additional paid-in capital.
If common stock is sold using an escrow arrangement in which cash is deposited in an escrow account for the purchase of the shares, the issuer should determine who owns the escrow account in the event of the investor’s bankruptcy. If the investor’s creditors have access to the escrowed cash in the event of the investor’s bankruptcy, the cash held in escrow should not be recorded on the issuer’s balance sheet and the common stock should not be recorded until the escrowed cash is legally transferred to the issuer and the shares are delivered to the investor.
In some cases, a legally issued and outstanding share of common stock may be accounted for as a contract to issue shares (e.g., if the shares are contingently returnable (subject to recall)) rather than an outstanding share for accounting purposes. This determination requires an understanding of the legal arrangement and is subject to significant judgment. See FG 5.1 for additional information, including an example.
Common stock may be sold for future delivery through a forward sale contract. In a forward sale contract, the investor is obligated to buy (and the reporting entity is obligated to sell) a specified number of the reporting entity’s shares at a specified date and price. See FG 8.2.1 for information on forward sales of a reporting entity’s own equity securities.
When common stock is sold in a bundled transaction with other securities or instruments, such as preferred stock or warrants, the proceeds should be allocated between the common stock and other instruments issued. How the proceeds are allocated depends on the accounting classification (i.e., liability or equity) of the other instruments. See FG 8.4.1 for information on warrants issued with common stock.
If separate classes of securities, which each meet the requirements for equity classification (such as preferred or common stock), are issued together in a single transaction, the issuance proceeds should be allocated to each class based upon their relative fair values. The fair value of each class of equity securities may be different than the amounts stipulated in the purchase agreement. When multiple investors are involved, the allocation of proceeds should be performed on an investor-by-investor basis.
When a reporting entity receives a note rather than cash or other assets in exchange for issuing common stock, the note should generally be classified as a contra-equity account, which offsets the increase in equity from the issuance of the shares. See FG 4.5.1 for additional information.
