What Is Contributed Surplus?

The contributed surplus is the amount of capital from the issuance of shares above the par value. Also known as additional paid-in capital, the surplus is recorded in shareholders’ equity on the balance sheet.

Breaking Down Contributed Surplus

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.

Example of Contributed Surplus

Cisco Systems, Inc. had approximately $45.3 billion of common stock and additional paid-in capital as of the 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 vesting of restricted stock units, paid $1.54 billion in share-based compensation and issued $168 million in stock for acquisitions.

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Note: The other major component of Shareholders’ Equity is retained earnings. Retained earnings is 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.

View more information: https://www.investopedia.com/terms/c/contributedsurplus.asp

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