Accounting for stock subscriptions

August 1, 2014

Some corporations are willing to sign stock purchase contracts with prospective shareholders. This is called a stock subscription, and the accounting treatment for such transactions is different than accounting for a regular stock issuance.

1. What is a stock subscription, and why is it a legal contract?

Stock subscriptions are contracts signed between a corporation and another party. This contract states that the corporation will issue stock at a later date for a specific price per share. Many subscription contracts require a down payment - in return, the corporation holds the stock in reserve for the purchaser until the future date.

You may be wondering why subscriptions require a formal contract and perhaps a down payment. Consider the situation in which the stock value plummets in between the subscription date and the date the purchaser would have paid for the stock. Without some kind of penalty, the buyer could simply walk away from the deal. On the other hand, the buyer would benefit from any gain in stock price. You may recognize this set of situations from our article about derivatives as a free call option for the stock. If the buyer has something to lose, there would be a cost to refusing to buy the stock.

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