Significance of treasury stock; [News items];

              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