Evolution of accounting for corporate treasury stock in the United States

              Norlin G. Rueschhoff ASSOCIATE PROFESSOR UNIVERSITY OF NOTRE DAME
THE EVOLUTION OF ACCOUNTING FOR CORPORATE TREASURY STOCK IN THE UNITED STATES
Abstract: Is treasury stock an asset or a reduction of net equity? This study is concerned with the process of accounting for treasury stock from as early as 1720 to date. It illustrates the many methods which have been used to create funds by the purchase and sale of treasury stocks and concludes with a consideration of the effects of the Internal Revenue Act of 1934 and the Security Exchange Act of 1934 on the treatment of treasury stock.
In 1919, William A. Paton stated that treasury stock is a reduction of equity, not an asset. Fifty years later he reaffirmed this view, pointing out that treasury shares have substantially the same status as unissued shares and, like unissued shares, can never be con-strued as owned property. Paton asserted that acquisition of treas-ury stock is a partial liquidation of equity and must be so recorded.1
Some financial writers hold that treasury stock may be an invest-ment.2 Others state that the repurchase of stock can not be treated as an investment decision as the term is commonly defined. Since repurchasing stock does not add to the earning power of a concern, theorists hold that the decision by a firm to buy its own stock should be regarded either as a financing decision or a dividend distribution decision.3
Part of the confusion in accounting over the nature of treasury stock has been caused by the practice of reporting treasury stock at cost, first on the asset side of the balance sheet and later as a reduction of shareholders' equity in a contra-equity account. To im-prove our understanding of current practice, this paper traces the history of accounting for treasury stock and shows how its valua-tion at cost evolved—and created problems.
Early Accounting & Financial Practices
Prior to 1925 the "treasury stock device" was frequently used to obtain working capital in new and speculative enterprises. Organ-izers received fully-paid shares for their contributions of property or services, and they in turn donated some of these shares back to