Acquisition of Assets in Exchange of Stock
A corporation may issue stock in exchange for an operating asset(tangible and intangible). There are two approaches for determining the cost of an asset obtained in this type of acquisition. The first approach uses the value given up by the firm to determine the cost of the asset. This amount constitutes the value foregone by not selling the shares of stock and equals their market value less the costs of issuing them. The second approach assumes that the new stockholder holds claims equivalent to the fair market value of the asset.
If the market value of the stock is uncertain, advocates of the “value given up” approach substitute the value received by the corporation as a best approximation. Conversely, if the value of the asset is not known with certainty, advocates of the “value received” approach substitute the market value of the stock issued as a best approximation. Thus, both positions are pragmatically the same and result in using either the value of the stock or the asset, whichever is more certain.
If neither figure is known with certainty, all that can be done is to record an estimated figure which may have to be revised if better information becomes available. A brief reflection, however, should indicate that it would be unusual for a buyer and seller to reach agreement on an exchange without some idea of the value of the assets or stock.
As an example of a stock transaction, suppose that a company issues 1,000 shares of $5 par common stock to obtain an asset worth about $12,000. If there were no reliable measure of the market value of the shares (apart from this transaction), the entry would be:
On the other hand, if valid transactions had recently occurred which established a market value of $11.50 per share, the entry would be:
If the stock had been sold on the market, the net inflow would have been less than $11.50 per share because of brokerage and legal fees. Thus, if the stock’s value is to be used as the measurement, it should be modified to reflect the issuance costs, and the asset should be recorded at a lower cost.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.