What is contributed surplus?
Contributed Surplus is an account of the shareholders’ equity section of the balance sheet that reflects any excess amounts recorded from the issuance of shares above their par value. This account also holds gains and losses from the issuance, repurchase, and cancellation of shares, as well as gains and losses from the sale of complex financial instruments. This account is also commonly referred to as Additional Paid-In Capital.
A contributed surplus transaction will typically specify where the surplus is coming from. Different companies may set up a varying number of related accounts, each with specific names to highlight where the amount has come from.
Contributed surplus account types
Regardless of account naming, there are three main types of contributed surplus accounts. Each type has different criteria for recognizing equity that falls under it.
This type of contributed surplus account carries any excess on the issuance of shares with a par value. No amount is carried into contributed surplus if a share with zero par value is issued.
Example: CFI Inc. issues 50,000 $1 par value common shares at $25 each, and so receives $1,250,000 in cash for the transaction. $50,000 (50,000 shares * $1/share) of this is allocated to the common stock equity account, and the remaining $1,200,000 (50,000 shares * ($25-$1)) is allocated to contributed surplus – issuance of common shares. This account is a Contributed Surplus – Type A account.
These accounts carry any gains made on repurchasing stock. If a loss is made, then the loss is taken out of this account, unless under special circumstances. When a stock is purchased, it is taken off the books at the value it was entered in but is paid for at market value when it exceeds book value.
Example: CFI Inc. decides to repurchase all 50,000 shares it originally issued in the previous example. In the time that has passed since then, the market value of the shares declined to $20. This means that company gets to keep $5 in value per share on repurchase, for a total of $250,000 (50,000 shares x $5 / share). This extra $250,000 is credited into contributed surplus – repurchase and cancellation of common shares, which is a Type B account.
These accounts carry any other equity value on share transactions that don’t fall under type A or B. These accounts also carry any values that result from the sale of some complex financial instruments. This type of contributed surplus account is a bit more complex in nature to understand. Please visit the article dedicated to Contributed Surplus – Type C if you would like to know more.
Common Type C accounts include:
- Expired warrants
- Stock Options
- Expired Stock Options
- Conversion rights (on convertible bonds)
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