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Issuing stock for non-cash assets

Posted in: Stockholder's equity (explanations)

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Companies need long term fixed assets (land, building and vehicles etc.) to carry out various business activities. One way to
acquire these assets is to purchase them for cash and another way is to acquire them in exchange of company’s stock.
Issuing stock for non-cash tangible and intangible assets is common among companies but valuation often becomes a
major problem in such transactions. The general rule is to record these transactions on the basis of fair market value of the
non-cash asset acquired or the fair market value of the stock issued whichever can be more clearly and reliably
determined.

If the fair market value of the asset to be received or the stock to be issued is not readily determinable, the board of directors
or management can determine a value that is fair in their opinion. They can also seek the assistance of a qualified
independent valuer for this purpose.

Example:
The Northern company purchased a piece of land to build a new factory on it. The company will issue 20,000 shares of its
$10 par value common stock to the vendor of land as consideration. Make journal entries in each of the following situations:

1. The fair value of the stock is $260,000 and the fair market value of land cannot be reliably determined.
2. The fair market value of the land is $280,000 and the fair market value of the stock cannot be reliably determined.
3. The board of directors seeks the help of a professional valuer who values the land at $270,000.

Solution:
(1). When the fair market value of stock is readily determinable:

(2). When the fair market value of land is readily determinable:

(3). When the land is valued by an independent professional:

Companies may also use their treasury stock to acquire non-cash assets. If treasury stock is used, the fair value of the
treasury stock or the fair value of non-cash asset should be used for valuation. The cost of treasury stock should not be
used for this purpose.

The issuance of stock for a non-cash item is a non-cash financing activity that should be disclosed at the bottom of the
statement of cash flows or in a separate note to the statement. For further information about such disclosure, read non-cash
investing and financing activities article.

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