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74 HASKINS & SELLS October T H E fallacy of making charges against what frequently is termed capital surplus lies in the fact that the charges usually represent actual losses of capital, while the so-called capital surplus too frequently is a product of the imagination. First, and foremost, it is a mistake to regard an estimated increase in the value of depreciable property as capital surplus. Carefully examined, the credit for the increase proves to be nothing more than bookkeeping, inasmuch as, properly applied, the credit serves to adjust the amount of depreciation chargeable to operations. Such treatment explodes the fiction that because of a theoretical increase in value there has been an increase in the amount of depreciation. It insures a continuation, in the future, of the depreciation charge in the same amount as would have been the case had the depreciable property not have been revalued. In the face of the foregoing assertion, perhaps one should examine the question of what may give rise to capital surplus. Broadly defined, capital surplus might be said to be the excess of asset values over liabilities and reserves and capital, whether actual or stated, and earned surplus. But, irrespective of certain statutes and judicial decisions, the opinion may be advanced that the time has passed when any such definition will suffice. The tendency, now strongly marked, is to inquire into the origin of so-called capital surplus and to determine whether or not the recognition of such surplus is justified by the reason advanced for its creation. The doubt well may be expressed that capital surplus properly springs from the upward revaluation of any asset, the amortization or writing down of which is contemplated in the future. Strongly intrenched as the idea has become that capital surplus may be so created, provided the increase in value is realized out of future earnings, careful thought tends to convince one that such reasoning is fallacious, and that the treatment of such items should be the same as that appropriate in the case of depreciation of appreciated value. Excluding physical assets subject to depreciation and intangibles subject to amortization from those assets, the revaluation of which may give rise to capital surplus, there remain land, certain classes of intangibles, like contracts and good-will, and securities, either readily marketable or held for investment. It may be conceded that land, in certain cases, appreciates in value and that such appreciation may be recognized and given effect on the books by writing up the asset and crediting capital surplus. It may be granted that contracts and good-will may follow the same course and be similarly treated. Likewise, an increase in the market value of securities, and an increase in the value of securities representing related companies not wholly owned might serve as a reason for their revaluation, with the increase reflected in a capital surplus account. While no particular good would be accomplished in the foregoing cases by writing the assets up to their estimated value, further than to gratify a desire to see them appear in their best light, no harm would be done if the amount corresponding to the increase were to be credited to capital surplus. And, going a step further, no particular harm would result if the increase in value were apportioned among stockholders in the form of a stock dividend. But, inasmuch as such steps would be based on estimated increases, it seems that no conservative directorate would be tempted, by so doing, to chance criticism later in the event that the estimate were not well founded. Misusing Capital Surplus
Object Description
Title |
Misusing capital surplus |
Author |
Anonymous |
Subject |
Surplus (Accounting) |
Citation |
Haskins & Sells Bulletin, Vol. 11, no. 10 (1928 October), p. 74-75 |
Date-Issued | 1928 |
Source | Originally published by: Haskins & Sells |
Type | Text |
Collection | Deloitte Digital Collection |
Digital Publisher | University of Mississippi Libraries. Accounting Collection |
Date-Digitally Created | 2009 |
Identifier | HS Bulletin 11-p74 |