Evaluating the par value concept

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Par value, or a face value, is the minimum prices of a share of stock which assigned by the issuer that can be sold for, according to the conditions and terms that found in the regulations of issuing company. The par value is an arbitrary amount that determined when a company was incorporated. It is also an initial price of the stock that introduced in the market place. For instance, 20% preference shares of RM1 each. RM1 is the par value. Par value has no relation to the market value of a stock. Shares cannot be issued for a payment that less than par value unless the liable shareholders that able to pay the remainder amount.

Inversely, no par value (NPV) is the shares were issued without par value, which means that there is no specification of a par value indicated either on the share certificate or in the issuer firm's charter or prospectus. Company found that no par value will bring beneficial to issue the no par value stocks. At time same time, there are also some disadvantageous to the shareholders when the company apply no par value. All of these will be discuss in more depth of the following task.

We have concluded that no useful function is served by the par value concept. Moreover, it is arbitrary and misleading.

Based on the statement above, we are agreed with it. When par value is applied, liability to the shareholders will become high in the event that the price of share falls dramatically below the par value. Besides, par value is misleading to the unsophisticated invested. It obscures the reality that a share is no more than a proportionate interest in the net worth of business. The existence of the par value is different with the market value and it may causes confusion for those investors are newbie, creditors as well as the shareholders. The par value has no relation to market value of the common stocks .The value that will be use to buy the share by investors is the market value of the share and not the par value, this is no reason why should the par value still exist for the initially value of share.

Furthermore, with the par value regime, it can lead to the complexity of preparing the account. Company need to prepare the common stock account and also the share premium account. In contrast, with the no par value regime, company need to prepare the common stock account only. The complexity of preparing account is result in the unnecessary additional cost and also time consuming for the additional of paperwork to amendment the things.

Moreover, the par value of the shares are sometimes no useful for the investors for investment decision. This is because the investors may not refer to the par value to do an analysis by comparing the par value and no par value regime and then make investment decisions. Investors are influenced more by the company's business reputation.

In the contrast, we could not deny that the par value regime got its own useful function toward the company. Par value of the share is not misleading. Business people are not accessing the value of shares by the existence of the par value. Besides, the existence of par value can be the guideline for the investors to make investment decisions well by comparing the par value with the market value. Difficulties about issue of shares at a discount can be removed without abolishing the par value. They can, for example, issuing share with low par values, or simplifying the process of the issuing share at a discount.

Question 2

Discuss the advantages and disadvantages of No Par Value regime. Your discussion should include the implications of implementing this No Par Value regime on the:

(i) Laws and Regulations

Companies often distribute money or profit to the stakeholders in the form of dividend. For the preference shares with the par value regime, it will limit the amount of money that can be given to the stakeholders. The advantage of no par value regime on laws and regulations is it did not limit the amount that can be paid out to the preference stakeholders' it is depend on the profit that the companies gain and the laws and the regulations had set. With the no par value regime, the laws and regulations will become more simplicity and desirable. It may reduce the procedure of recording account.

Due to the changing of the par value regime to no par value regime, it will result in additional cost for the amendment of the laws and regulations. Without the par value regime, some unwise or ineptitude director may reduce the outstanding shares by accepting the bargain basement prices on new issues and it was very unfair to the current stakeholders. Besides, without the par value regime, there is the possibility that unethical parties may take advantage of unfamiliar investors with NPV to mislead and misinform. They might against the laws and regulations that had set by issuing the amount of share in a very high amount. Furthermore, without the par value on the preference shares, company may not have any reference to calculate the amount of dividend that need to pay to the stakeholders, it may causes the difficult to calculate the amount and as well as time consuming in calculate.

(ii) Accounting treatments

The advantage of No Par Value on accounting regime is can prevent a contingent liability to stakeholders in the unlikely event where the price falling below the par value which is called stock discount. Without par value means without the existence of the share premium and discount account. Thus, company no need to use the retained earnings or the asset of the company to cover the losses of discount share. Besides, without a par value regime, it can reduce the unnecessarily complex accounting system and the financial accounts can be greatly simplified. A Company with a par value regime has to prepare a share premium account and share capital account separately which is more complex. Contrarily, a company without par value regime would eliminate the need to maintain the share premium account because the share premium account is a part of the share capital account which is more simplify than a company with a par value regime. Below is the example of recording the share with par value and no par value.

General Journal

Par Value

No Par Value

Dr - Cash

Cr - Common Stock

Share Premium

Dr - Cash

Cr - Common Stock

The obvious saving for the no par value regime is the abolishment of payment for registration of authorized capital and no longer to state in its memorandum. However, other filling requirement do not gives substantial savings. Any mandatory change such as additional paper work required in complying with the proposed amendment and filling their constitutions will results in the additional cost. It seems strange to try to mandate no par value shares for private companies when public companies would still have par value shares. For example, if an existing company were to re-register its par value regime, it would have had to change its par value shares to no par value to comply with the proposals. It will result in an additional costs and time consuming.

(iii) Investment decisions

The advantages of no par value regime on the investment decisions is it will eliminate investor confusion. Without the existence of par value, investor can only refer the real market value that the company offered and no need to compare the real market value with the par value if exist. It would sometime make investor difficult to make decisions. Besides, with the no par value regime, it may eliminate the prejudicial of investor. This is because with the existence of par value regime, investor may estimate or judge the company performance by comparing only the real market value with the par value without go through an analysis of the company performance.

In contrast, without the par value regime, investors are difficult to make investment decisions and it is more risky. This is because without a par value, investor is difficult to compare and analysis whether the company they plan to invest is in the good performance. For example, a company's par value is RM1, whereas its market value is RM10. With the par value regime, investor can analysis it by comparing the realize market value with the par value. Without the par value regime, investors are no idea about the performance of the company and they need to find another approach to find enough information to analysis, evaluate and only can make a final decisions.

Question 3

After the discussion, we agree that the company should support the implementation of NPV regime in Malaysia. NPV regime reduce any unnecessarily complex accounting system. Company is no longer required to state its authorized capital in its memorandum. Thus, the financial accounts can be greatly simplified and it is reduce the compliance cost as well as saving more time that the company is easier to raise capital.

Besides, NPV regime provide more flexible financing option for the company and this may create more opportunity for the company to raise capital and result in the improvement of a company. Company need to be more flexible and become more competitive so that they just only can compete with others company and operate well in the rapid changing world.

Apart from that, NPV regime avoid the possibility of creating liabilities to the stakeholders in the case of a stock discount which mean the traded share price is falling below the par value of the shares. In order to avoid taxation, many company would reduced the face value of their par value shares, creating a serious problem for the state taxing authorities. With the NPV regime, it may help to reduce such problems.

In conclusion, the abolishment of par value of share in Malaysia should be carry out in order to ensure that our company laws can remains contemporary and able to compete with others company within the global scene and spur in the entrepreneurship within our nation.