Reporting treasury stock as an asset: Law, logic, and economic substance

              The Accounting Historians Journal Vol. 9, No. 2 Fall 1982
Terry K. Sheldahl MILLSAPS COLLEGE
REPORTING TREASURY STOCK AS AN ASSET: LAW, LOGIC, AND ECONOMIC SUBSTANCE
Abstract; This paper traces development in the accounting literature, circa 1909-1933, of, dominant support for contra-equity presentation of treasury stock, and re-lates this overview to prominent current arguments for selective asset treatment. Classic "logical" objection to asset analysis is found to be compelling. Contem-porary challenges to prevailing doctrine in terms of "economic substance," enjoy-ing distinguished lineage from the earlier era, are recast as attractive recording and disclosure proposals. An auxiliary theme is the changing nature of relevant objection of "legalism." Sources include Hatfield, Esquerré, Montgomery, Paton, Kohler, and (of particular note) Sunley, and current analysts Allan Young and Beatrice Melcher.
The recording of treasury stock transactions is a relatively flexible area, aside from any applicable legal requirements. There are alter-native basic methods, the "par value" and "cost" approaches, each permitting varied treatment of pertinent "loss," in particular. In ac-counting terms, however, neither gain nor loss may be recognized in reacquisition, reissuance, or retirement of stock.1
The corresponding reporting doctrine is that treasury stock is a negative "equity" item, not an "asset." For fully half a century this position has enjoyed overwhelming support among accounting writers; in slightly qualified form it has since 1934 had "authorita-tive" professional endorsement;a and, reinforced by SEC provisions
Beyond the specific reference in note c, indebtedness is gratefully acknowledged to the two anonymous reviewers for their constructive comments and suggestions. An earlier version of this paper, entitled "An Historical Perspective on Asset Pre-sentation of Treasury Stock," was presented at the 1979 Annual Meeting of the American Accounting Association—Northeast Region.
aThe reference is to a 1934 AI(CP)A statement, still accepted as authoritative, which allows that "it is perhaps in some circumstances permissible to show stock of a corporation held in its own treasury as an asset, if adequately disclosed" (emphasis added). Without qualification, the Committee on Accounting Procedure in 1938 rejected both recognition of gain or loss on treasury stock transactions, and direct adjustment of retained earnings in lieu of gain recognition. Financial Accounting Standards Board, pp. 9 (citation), 10 (Accounting Research Bulletin 43, Chapter 1, Sections A, paragraph 4, and B).