Discount on no-par shares;

              34 HASKINS & SELLS May
Discount on No-Par Shares
By JOHN R. WILDMAN
NO-PAR shares carry the implication
that the value of the assets which
they produce upon issuance, fixes the
amount of capital which they bring into the
enterprise.
This theory recognizes no such factor
as discount. It dismisses from considera­tion
any financing spread between the
public offering price and the settlement
price under an underwriting agreement.
It ignores any cost to the corporation, such
as commission, or over-the-counter ex­pense.
It considers only the effective capi­tal
as represented by the amount of net
proceeds received by the corporation.
Whether or not this procedure is per­missible
is a matter of statute in each case.
But so far as is known there are no statutes
which prohibit such practice. Generally,
the statutes applicable to no-par shares
permit their issuance for such consideration
as may be fixed by directors, or by share­holders,
or both. Such shares issued legally
are deemed full-paid and non-assessable.
Whether or not the theory of effective
capital is sound economically, perhaps is
subject to debate. If profits are to be
subjected to charge for the use, by the
enterprise, of contributed capital, there
might be some justification for setting up
any expense incident to the acquisition of
the capital and deferring such expense so
as to spread it over some future period.
This procedure, however, is tantamount to
recovering a part of the capital out of
future earnings and finds little in the nature
of sound theory to recommend it.
Further, in considering the matter from
this angle, there is likely to be confusion
between the practice of making a charge
against profits for the purpose of having
contributed capital earn an interest return
on investment, and recovering out of future
earnings, by means of arbitrary pro-ration,
loss of capital incident to the acquisition of
certain capital.
The outstanding factor controlling a
decision with respect to treating as dis­count
the capital stock financing expense in
connection with sales of no-par shares, is
found in the word "acquisition." Expense
incident to acquisition of capital should be
differentiated, it seems, from expense in­cident
to the use of capital. Financing ex­pense
for underwriting, or commissions, or
selling shares over the counter, seems
clearly to be incurred in acquiring the
capital.
Previous to the introduction of statutes
governing the issuance of shares without
par value, no latitude was permitted as to
the discount factor. True, the discount
did not appear as such, but it was in the
accounts under some other description.
The present statutes authorizing the issu­ance
of no-par shares generally imply that
the expense may be deducted before the
amount of effective capital is credited to
capital account. Expense sustained in
acquiring capital is not related to the
future use of that capital. The deferring
of such expense distorts the true earning
power of the effective capital. It is mis­leading
to show as capital invested in an
enterprise, an amount, a part of which
must be recovered out of earnings before
it becomes effective capital. The return
to proprietary capital in enterprise is
profit; not interest. There is no point
in placing capital derived from no-par
shares on a quasi-par stock basis.
The capital attributed to no-par shares
should be the net amount of consideration
received for such shares. It may seem
desirable, from a historical point of view,
to first record the financing expense in an
expense account. But once so recorded
the expense account should be closed out
to the capital stock account, so that the
latter will reflect, for balance sheet pur­poses,
only the effective capital employed
in the enterprise.