Contributedsurplus

Defining Contributed Surplus: A Guide for Investors

Key Takeaways

A contributed surplus is the capital from issuing shares above par value, recorded in shareholders' equity.
This surplus is also known as additional paid-in capital and appears on the balance sheet.
Changes in the contributed surplus account are reflected in a company's consolidated statement of equity.
Example: Cisco Systems had a notable balance in common stock and additional paid-in capital during its fiscal year 2017.
Share repurchases, stock compensation, and acquisitions impact the contributed surplus balance.
A contributed surplus, also known as additional paid-in capital, is the extra capital received by a company from issuing shares at a price above their par value. This surplus is an important component of shareholders' equity, making it a critical piece of a company’s financial health and balance sheet. Understanding contributed surplus can help investors evaluate a company's financial strategies, such as handling share issuances, stock compensation, and share repurchases. Contributed surplus plays a significant role in financial statements, and grasping its concept is crucial for financial analysis and investment decisions."

Understanding Contributed Surplus in Corporate Finance

Initially, a share issuance of common shares will be allocated into two buckets — one for common stock, the other for additional paid-in capital or contributed surplus. For example, ABC Inc. issues 100,000 $1 par value common shares at $15 per share. The company receives $1.5 million (100,000 shares x $15), $100,000 (100,000 shares x $1) of which is allocated to common stock and the balance of $1.4 million ((100,000 x ($15-$1)) to contributed surplus. Subsequent share issuances, repurchases, share-based compensation, and related tax effects are recorded in the contributed surplus account. These changes are accounted for on a company's consolidated statement of equity. The balance at the end of a period appears as "common stock and additional paid-in capital" (or by a substantially similar name) on the balance sheet.

Real-World Example: Contributed Surplus at Cisco Systems

Cisco Systems, Inc. had approximately $45.3 billion of common stock and additional paid-in capital as of its fiscal year 2017. The company started the fiscal year with a balance of $44.5 billion as seen on the consolidated statement of equity. During the fiscal year 2017, Cisco issued $708 million of common stock, repurchased $1.05 billion of common stock, repurchased $619 million worth of shares for tax withholdings on the vesting of restricted stock units, paid $1.54 billion in share-based compensation, and issued $168 million in stock for acquisitions.1

The other major component of shareholders' equity is retained earnings. Retained earnings are broadly defined as net income less dividends paid if any. The contributed surplus is sometimes misinterpreted as an account where "surplus" money (i.e., revenue in excess of all expenses) sits. It is the "contributed" part of the term that is to be associated with investments by shareholders.

CISCO. "2017 Annual Report," Pages 68, 71-72. Accessed Oct. 31, 2020.

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