What Is Additional Paid-in Capital (APIC)?
Additional paid-in capital (APIC) is an accounting term referring to money an investor pays above and beyond the par value price of a stock.
Often referred to as "contributed capital in excess of par,” APIC occurs when an investor buys newly-issued shares directly from a company during its initial public offering (IPO) stage. APIC, which is itemized under the shareholder equity (SE) section of a balance sheet, is viewed as a profit opportunity for companies as it results in them receiving excess cash from stockholders.
- Additional paid-in capital (APIC) is the difference between the par value of a stock and the price that investors actually pay for it.
- To be the "additional" part of paid-in capital, an investor must buy the stock directly from the company during its IPO.
- The APIC is usually booked as shareholders' equity on the balance sheet.
- APIC is a great way for companies to generate cash without having to give any collateral in return.
Additional Paid-In Capital
How Additional Paid-in Capital (APIC) Works
During its IPO, a firm is entitled to set any price for its stock that it sees fit. Meanwhile, investors may elect to pay any amount above this declared par value of a share price, which generates the APIC.
Let us assume that during its IPO phase the XYZ Widget Company issues one million shares of stock, with a par value of $1 per share, and that investors bid on shares for $2, $4, and $10 above the par value. Let us further assume that those shares ultimately sell for $11, consequently making the company $11 million. In this instance, the APIC is $10 million ($11 million minus the par value of $1 million). Therefore, the company’s balance sheet itemizes $1 million as "paid-in capital," and $10 million as "additional paid-in capital."
Once a stock trades in the secondary market, an investor may pay whatever the market will bear. When investors buy shares directly from a given company, that corporation receives and retains the funds as paid-in capital. But after that time, when investors buy shares in the open market, the generated funds go directly into the pockets of the investors selling off their positions.
APIC is recorded at the initial public offering (IPO) only; the transactions that occur after the IPO do not increase the APIC account.
APIC is generally booked in the SE section of the balance sheet. When a company issues stock, there are two entries that take place in the equity section: common stock and APIC. The total cash generated by the IPO is recorded as a debit in the equity section, and the common stock and APIC are recorded as credits.
The APIC formula is:
APIC = (Issue Price – Par Value) x Number of Shares Acquired by Investors.
Due to the fact that APIC represents money paid to the company above the par value of a security, it is essential to understand what par actually means. Simply put, “par” signifies the value a company assigns to stock at the time of its IPO, before there is even a market for the security. Issuers traditionally set stock par values deliberately low—in some cases as little as a penny per share—in order to preemptively avoid any potential legal liability, which might occur if the stock dips below its par value.
Market value is the actual price a financial instrument is worth at any given time. The stock market determines the real value of a stock, which shifts continuously as shares are bought and sold throughout the trading day. Thus, investors make money on the changing value of a stock over time, based on company performance and investor sentiment.
Additional Paid-in Capital vs. Paid-in Capital
Paid-in capital, or contributed capital, is the full amount of cash or other assets that shareholders have given a company in exchange for stock. Paid-in capital includes the par value of both common and preferred stock plus any amount paid in excess.
Additional paid-in capital, as the name implies, includes only the amount paid in excess of the par value of stock issued during a company's IPO.
Both of these items are included next to one another in the SE section of the balance sheet.
Benefits of Additional Paid-in Capital
For common stock, paid-in capital consists of a stock's par value and APIC, the latter of which may provide a substantial portion of a company's equity capital, before retained earnings begin to accumulate. This capital provides a layer of defense against potential losses, in the event that retained earnings begin to show a deficit.
Another huge advantage for a company issuing shares is that it does not raise the fixed cost of the company. The company doesn't have to make any payment to the investor; even dividends are not required. Furthermore, investors do not have any claim on the company's existing assets.
After issuing stock to shareholders, the company is free to use the funds generated any way it chooses, whether that means paying off loans, purchasing an asset, or any other action that may benefit the company.
Why Is Additional Paid-in Capital Useful?
APIC is a great way for companies to generate cash without having to give any collateral in return. Furthermore, purchasing shares at a company's IPO can be incredibly profitable for some investors.
Is Additional Paid-in Capital an Asset?
APIC is recorded under the equity section of a company's balance sheet. It is recorded as a credit under shareholders' equity and refers to the money an investor pays above the par value price of a stock. The total cash generated from APIC is classified as a debit to the asset section of the balance sheet, with the corresponding credits for APIC and regular paid in capital located in the equity section.
How Do You Calculate Additional Paid-in Capital?
The APIC formula is APIC = (Issue Price – Par Value) x Number of Shares Acquired by Investors.
How Does Paid-in Capital Increase or Decrease?
Any new issuance of preferred or common shares may increase the paid-in capital as the excess value is recorded. Paid-in capital can be reduced with share repurchases.
Correction—March 29, 2022: A previous version of this article inaccurately represented where APIC appears on the balance sheet.