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52 HASKINS & SELLS July The Significance of Treasury Stock IN the somewhat remote past the term treasury stock was used to mean either stock authorized and unissued, or stock once issued for value and subsequently reacquired, depending on one's concept of the term. Time, thought, and a better understanding generally of accounting terms have served to clarify this conflict of usage, so that to-day treasury stock has come to mean but one thing, namely, the capital stock of a corporation reacquired by the corporation after once having been issued for value. Consideration of the matter of treasury stock need involve little discussion of the motives which prompt the acquisition. The effect of such procedure rather is of the more importance. The law generally does not require that a company acquiring its own capital stock shall cancel that stock. Legally the purchase by a corporation of its own stock does not effect a reduction of its capitalization, or its capital. Economically there is at least a suggestion of reduction in the capital since, in cases where the stock is purchased, assets of the business, and usually cash, have to be taken to pay back to certain stockholders, capital contributed or earned by them either in theory or fact. Whether the stock was issued originally for bona-fide values or values based on fiction and convenience, seems to have little bearing on the effect when the stock is reacquired. Any stock outstanding represents, both legally and economically, share ownership in the net assets of the corporation, on whatever basis the net asset value may be fixed. The act by the corporation of taking up any of its shares must of necessity be accompanied by the complementary act of parting with or reducing some of its assets. Except the corporation elects to cancel the shares so acquired, they are substituted in the list of assets in place of those surrendered in exchange for the stock. Here, then, is a sort of wheel within wheel; the carrying of an asset which is offset by stock, the proprietary value of which rests in the company's net assets exclusive of the treasury stock. But, it is contended, the treasury stock may be sold and replaced by cash. This is all true enough, as is also the rejoinder that if the limit of authorized capital has not been reached new stock might be sold at the same rate. The fact remains that the condition of the treasury would be the same prior to the sale whether the stock sold is called unissued stock or treasury stock. And, apparently, treasury stock is a sort of myth which is made possible by an offsetting credit in the capital stock account. There can be no objection to carrying an account on the financial books for treasury stock any more than for unissued stock. As a matter of record and convenience, it seems good practice to do so. Treasury stock frequently is received as a result of donation. A separate account on the books facilitates keeping track of it. Likewise, such stock is sometimes bought by a corporation for purposes of resale or distribution as a bonus or award in connection with other profit-sharing schemes to employees. Under such conditions, with activity in the transactions giving rise to frequent charges and credits, it would be obviously unwise to mix such transactions with the capital stock accounts. Again, treasury stock may be acquired as a means of reducing capital to conform to the needs of the business without the legal formality of obtaining authorization from the state. This expedient has the advantage of keeping the stock available
Object Description
Title |
Significance of treasury stock [News items] |
Author |
Anonymous |
Subject |
Stocks -- Accounting |
Personal Name |
Wildman, John Raymond, 1878-1938 |
Citation |
Haskins & Sells Bulletin, Vol. 06, no. 07 (1923 July), p. 52-53 |
Date-Issued | 1923 |
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 6-p52 |