Additional Paid-In Capital (APIC)

Additional paid-in capital, abbreviated APIC, is the stockholders’ equity caption that carries the consideration a corporation received for its shares above the par or stated value it carries in its capital stock caption. Once the caption exists it also absorbs credits and charges that are not sales of stock to an investor, so the balance is not by itself a record of what investors paid.

At issuance the credit is the consideration received for the shares minus the amount carried as capital for those shares.

The account is created by an issuance and then keeps moving without one. Compensation cost, a terminated S election, a retirement of shares and a stock dividend all reach it afterwards, and none of them is a sale of stock to an investor.

Where the Caption Sits

Two documents ask for the balance by name, and they put it in different places.

Regulation S-X files it under caption 30, other stockholders’ equity, where separate captions shall be shown for additional paid-in capital, other additional capital, retained earnings both appropriated and unappropriated, and accumulated other comprehensive income (17 CFR 210.5-02). A note to that caption then relaxes the separation, since additional paid-in capital and other additional capital may be combined with the stock caption to which it applies, if appropriate (17 CFR 210.5-02). A registrant can therefore present one combined line where the rule lists two, which is why the absence of a separate APIC line on a filed balance sheet proves nothing about whether the company raised anything above par.

The order of the captions around it is set out in stockholder equity, and the component sitting beside it is AOCI.

The corporate return allows no such combination. Additional paid-in capital has its own line 23 on Schedule L, directly beneath the capital stock line 22 that splits by class (IRS, Form 1120, Schedule L). That split is the subject of capital stock, and the lines that close the block are in stockholder equity.

What Moves the Balance After the Shares Are Issued

Equity-Classified Compensation Cost

Compensation cost for an award of share-based employee compensation classified as equity is recognized over the requisite service period, with a corresponding credit to equity, generally paid-in capital (FASB ASC 718-10-35-2, reproduced in Accounting Standards Update 2018-07). The standard says generally rather than always, so the requirement is a credit to equity and paid-in capital is the account it usually lands in. No cash arrives when that credit is posted. The period the cost is spread across is the subject of vesting.

A Terminated S Election

An S corporation that has undistributed earnings on the date its election is terminated must include those earnings in the financial statements as additional paid-in capital, on the assumption of a constructive distribution to the owners followed by a contribution to the capital of the corporation (SEC, Codification of Staff Accounting Bulletins, Topic 4:B). That is the SEC staff’s answer for financial statements filed with the Commission. Earnings nobody contributed end up in a caption named for what was paid in, which is the clearest case against reading the balance as money investors handed over.

A Retirement of Reacquired Shares

Where a corporation’s stock is retired, or purchased for constructive retirement, an excess of purchase price over par or stated value may be allocated between capital surplus and retained earnings, subject to a stated ceiling, while an excess of par or stated value over purchase price is credited to capital surplus (FASB, Accounting Research Bulletin No. 43, Chapter 1, Section B, paragraph 7(a)). So the account falls as well as rises. The ceiling itself, and the treatment of shares kept rather than retired, are worked through in treasury shares.

Capital surplus in that bulletin is wider than this one caption. The ceiling counts capital surplus paid in alongside voluntary transfers of retained earnings and the capitalization of stock dividends (FASB, Accounting Research Bulletin No. 43, Chapter 1, Section B, paragraph 7(a)), and Regulation S-X splits that ground between two captions, additional paid-in capital and other additional capital (17 CFR 210.5-02). A rule written about capital surplus therefore reaches this caption without being confined to it.

A Stock Dividend

Where the additional shares are few enough that the market value of the shares previously held remains substantially unchanged, the corporation should account for the issuance by transferring from earned surplus to the category of permanent capitalization, represented by the capital stock and capital surplus accounts, an amount equal to the fair value of the additional shares issued (FASB, Accounting Research Bulletin No. 43, Chapter 7, Section B, paragraph 10). Retained earnings falls, the paid-in captions rise, and nothing enters the corporation.

The bulletin then carves out the case most firms actually see. In closely held companies the shareholders’ intimate knowledge of the corporation’s affairs is presumed to preclude the misreading the transfer exists to prevent, so considerations of public policy do not arise and there is no need to capitalize earned surplus other than to meet legal requirements (FASB, Accounting Research Bulletin No. 43, Chapter 7, Section B, paragraph 12). What separates a dividend from a split, and so decides whether any transfer arises at all, is in stock split.

A Quasi-Reorganization

Amounts written off in a corporate readjustment should be charged first against earned surplus to the full extent of that surplus, and any balance may then be charged against capital surplus (FASB, Accounting Research Bulletin No. 43, Chapter 7, Section A, paragraph 6). Capital surplus originating in such a readjustment is afterwards restricted in the same manner as that of a new corporation (FASB, Accounting Research Bulletin No. 43, Chapter 7, Section A, paragraph 11).

The Caption Is Neither Cash Nor a Distributable Fund

The word paid invites two readings of this line, and neither one holds.

The first is that the balance arrived as cash. A board may authorize capital stock to be issued for consideration consisting of cash, any tangible or intangible property or any benefit to the corporation, or any combination of those (8 Del. C. § 152(a)). Where capital stock is issued to officers or other employees before the cash payment is received, the amount recorded as a receivable is presented in the balance sheet as a deduction from stockholders’ equity rather than as an asset (SEC, Codification of Staff Accounting Bulletins, Topic 4:E). The staff adds that it will not suggest deducting a receivable from an officer or director where the receivable was paid in cash before the financial statements were published and the payment date is stated in a note (SEC, Codification of Staff Accounting Bulletins, Topic 4:E).

The second is that a large balance is money available to pay out. Directors may declare and pay dividends out of surplus, as defined in and computed in accordance with sections 154 and 244 of the Delaware code, and where there is no such surplus they have a second route out of net profits for the fiscal year in which the dividend is declared, the preceding fiscal year, or both (8 Del. C. § 170(a)). Surplus there is a statutory computation on net assets and capital, set out in common stock, not a balance read off an accounting caption.

A Worked Reclassification

Say a corporation’s S election terminates and its books at that date carry the amounts below.

Capital stock, at par                                    5,000
Additional paid-in capital, before reclassification      95,000
Undistributed earnings at the termination date          310,000

Reclassified to additional paid-in capital              310,000
Additional paid-in capital, after reclassification      405,000

Nothing in the reclassified amount was ever paid to the corporation for shares. It was earned and left in the business, and the staff position moves it into the paid-in caption on the assumption of a distribution followed by a contribution. Anyone treating the closing balance as capital investors contributed is wrong by the whole reclassified amount, and the balance sheet line alone does not show it.

What Additional Paid-In Capital Is Confused With

Additional Paid-In Capital and Common Stock

They are two captions from one transaction. The common stock line carries the amount determined to be capital for those shares, which for a class with par value is at least the aggregate par, and additional paid-in capital carries the remainder of the consideration. Regulation S-X keeps them apart by caption number, common stocks at caption 29 and other stockholders’ equity at caption 30 (17 CFR 210.5-02). The arithmetic that splits one payment across the two lines is worked in common stock.

Paid-In Capital and Paid-Up Capital

Paid-in capital describes what came in. Paid up describes whether all of it arrived. Capital stock issued in accordance with the Delaware issuance provision is deemed fully paid and nonassessable upon receipt by the corporation of the consideration, and nothing in that subsection prevents the board from issuing partly paid shares (8 Del. C. § 152(d)). A partly paid share must state the total consideration to be paid for it and the amount paid on it, and a dividend on it is declared only on the basis of the percentage of the consideration actually paid (8 Del. C. § 156). Neither the Regulation S-X captions nor Schedule L carries a line called paid-up capital.

Common Questions

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