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Common stock should be recognized on its settlement date (i.e., the date the proceeds are received and the shares are issued). Upon issuance, common stock is generally recorded at its fair value, which is typically the amount of proceeds received. Those proceeds are allocated first to the par value of the shares (if any), with any excess over par value allocated to additional paid-in capital.
If common stock is sold using an escrow arrangement in which cash is deposited in an escrow account for the purchase of the shares, the issuer should determine who owns the escrow account in the event of the investor’s bankruptcy. If the investor’s creditors have access to the escrowed cash in the event of the investor’s bankruptcy, the cash held in escrow should not be recorded on the issuer’s balance sheet and the common stock should not be recorded until the escrowed cash is legally transferred to the issuer and the shares are delivered to the investor.
In some cases, a legally issued and outstanding share of common stock may be accounted for as a contract to issue shares (e.g., if the shares are contingently returnable (subject to recall)) rather than an outstanding share for accounting purposes. This determination requires an understanding of the legal arrangement and is subject to significant judgment. See FG 5.1 for additional information, including an example.
Common stock may be sold for future delivery through a forward sale contract. In a forward sale contract, the investor is obligated to buy (and the reporting entity is obligated to sell) a specified number of the reporting entity’s shares at a specified date and price. See FG 8.2.1 for information on forward sales of a reporting entity’s own equity securities.
When common stock is sold in a bundled transaction with other securities or instruments, such as preferred stock or warrants, the proceeds should be allocated between the common stock and other instruments issued. How the proceeds are allocated depends on the accounting classification (i.e., liability or equity) of the other instruments. See FG 8.4.1 for information on warrants issued with common stock.
If separate classes of securities, which each meet the requirements for equity classification (such as preferred or common stock), are issued together in a single transaction, the issuance proceeds should be allocated to each class based upon their relative fair values. The fair value of each class of equity securities may be different than the amounts stipulated in the purchase agreement. When multiple investors are involved, the allocation of proceeds should be performed on an investor-by-investor basis.
When a reporting entity receives a note rather than cash or other assets in exchange for issuing common stock, the note should generally be classified as a contra-equity account, which offsets the increase in equity from the issuance of the shares. See FG 4.5.1 for additional information.

4.3.1 Estimating the fair value of common stock

When common shares are not traded (or, in the case of bundled issuances of common and preferred shares, are not traded separately) in an active market, it can be difficult to determine their fair value. Nevertheless, US GAAP provides no relief from the requirement to determine fair value in those circumstances. When estimating the fair value of common stock, an issuer should follow the guidance in ASC 820, Fair Value Measurement. See FV 4 for information on determining the fair value of equity securities.
In addition, a reporting entity should consider the SEC staff’s views on “cheap stock.” Cheap stock broadly refers to equity instruments, such as common stock, stock options, or equity classified warrants, that are issued shortly before an initial public offering date, at prices significantly below the initial public offering price. See SC 6.6 for further information.

4.3.2 Market value guarantee of common stock

A reporting entity may enter into an arrangement with a shareholder under which it guarantees a minimum price for its common stock. Such a guarantee protects the shareholder from declines in the value of the reporting entity’s common stock. The terms of the guarantee may require the reporting entity to repurchase the shares from the shareholder in exchange for cash (i.e., the shares become puttable) or may require the shareholder to sell the shares in the open market and have the reporting entity pay the difference between the sales price and the guaranteed price.
When a market value guarantee is embedded in the common shares (i.e., the shares can be put to the reporting entity) the shares should be recorded in mezzanine equity. See FG 7.3.4 for further information on mezzanine equity classification. If instead, a market value guarantee requires the shareholder to sell its shares in the open market and the reporting entity pays the difference between the sales price and the guaranteed price, the market value guarantee may be a written put option which should be recorded as a liability based on the guidance in ASC 480, Distinguishing Liabilities from Equity. See FG 9.2.5 for information on written put options on a reporting entity’s own shares.

4.3.3 Common stock issuance costs

Common stock issuance costs are incremental costs directly associated with issuance. These costs typically include fees paid to bankers or underwriters, attorneys, accountants, as well as printers and other third parties. As discussed in ASC 340-10-S99-1 (SAB Topic 5.A), certain period costs such as management salaries or other general and administrative expenses are not considered costs of issuance Common stock issuance costs are generally recorded as a reduction of the share proceeds.
The SEC staff stated in ASC 340-10-S99-1 (SAB Topic 5.A) that prior to the effective date of an offering of equity securities, specific incremental costs directly attributable to a proposed or actual offering of securities may be deferred and charged against the gross proceeds of the offering. However, deferred costs related to an aborted offering (including an offering with postponement for more than 90 days) may not be deferred and charged against proceeds of a subsequent offering.

4.3.4 Modifications or exchanges of common stock

Although less common than modifications or exchanges of preferred stock, a reporting entity may modify or exchange its common stock, often in conjunction with a broader recapitalization of the reporting entity. There is no specific guidance related to a modification or exchange of common stock; therefore, the appropriate accounting treatment requires judgment and a careful evaluation of the facts and circumstances. Often, there is no accounting required for a modification or exchange of common stock. In situations when the modification results in a value transfer from the common shareholders to the preferred shareholders, it may be considered a deemed dividend to the preferred shareholders.
In situations when the modification or exchange results in a value transfer to a second class of common stockholder, the reporting entity should consider whether the value transfer should be considered in applying the two-class method of EPS.
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