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A reporting entity may receive a note, rather than cash, as a contribution to its equity. The note may be for the sale of common stock or a contribution to paid-in capital. The question arises as to whether the note should be presented as a receivable or as contra-equity. The predominant practice is to present the note receivable as contra-equity. ASC 505-10-45-2 indicates that reporting the note as an asset is generally not appropriate, except in very limited circumstances when there is substantial evidence of intent and ability to pay in a reasonably short time period.
For nonpublic entities, evidence of intent and ability to pay in a reasonably short period may include circumstances when the notes are secured by irrevocable letters of credit or other liquid collateral, have a stated maturity in a short time period, or when the notes are collected prior to issuance of the financial statements. SAB Topic 4-E (codified in ASC 310-10-S99-2) indicates that the SEC would permit recording such a note as an asset only if the note is collected prior to issuance of the financial statements.
For other transactions with shareholders, see FG 4.5.
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