New York Stock Exchange. Special Committee on Stock Dividends

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eGrove (Univ. of Mississippi)

University of Mississippi eGrove Haskins and Sells Publications Deloitte Collection 1929 Report of the Special Committee on Stock Dividends New York Stock Exchange New York Stock Exchange. Special Committee on Stock Dividends Follow this and additional works at: https://egrove.olemiss.edu/dl_hs  Part of the Accounting Commons, and the Taxation Commons Recommended Citation Haskins & Sells Bulletin, Vol. 12, no. 09 (1929 December), p. 70-71 This Article is brought to you for free and open access by the Deloitte Collection at eGrove. It has been accepted for inclusion in Haskins and Sells Publications by an authorized administrator of eGrove. For more information, please contact egrove@olemiss.edu. 70 HASKINS & SELLS December Report of the Special Committee on Stock Dividends New York Stock Exchange IN the requirements for the listing of investment trusts recently promulgated by the Stock Exchange, a provision was incorporated to the effect that investment trusts should not include stock dividends in their income accounts. In recent weeks, the wisdom of this ruling has been the sub-ject of discussion between the Stock Ex-change and representatives of many com-panies affected by its operation, and a special committee has been looking into the question of stock dividends from the point of view of the Exchange with a view to clarifying the issues involved. Based on the report of this committee to the Governing Committee, the following statement of position is made: The inter-est of the Stock Exchange in the method by which companies account for stock dividends arises out of its consistent policy of attempting to obtain, in connection with corporate returns, such a clear disclosure of the relevant facts as will enable the in-vestor to properly appraise the listed se-curities in which he is interested. The stock dividend has, in late years, become an important instrument in the financial policy of American corporations, and there can be little doubt that its use is still in the early stages of development. In particular is it of value to corporations in growing industries requiring the use of large additional amounts of capital, as it permits them in some measure to obtain this capital in the simplest manner from their own stockholders, and, at the same time, permits these stockholders, if they are so inclined, to realize upon their share of current or past earnings so capitalized. Coincident with the development of the stock dividend, there has taken place the development of the less than $100 par and of the no par value stock, together with the practice of having large capital or paid in surpluses; and these relatively new con-ceptions have led with increasing fre-quency to the corporate practice of partial or complete recapitalization through the form of so-called "split-ups." As a matter of definition from the point of view of the Exchange, a true stock divi-dend represents the capitalization, in whole or in part, of past or current earnings; while a split-up has not of necessity any relation to earnings and may mean nothing more than a change in the form in which ownership in an existing situation is ex-pressed. Accounting practice, in striving to adapt itself soundly to these important develop-ments in corporate procedure, has not yet reached the point where a mere perusal of the year's accounts will suffice to reveal to the average investor in what manner he has been affected by action taken during the year in the matter of stock dividends. On this account, it is felt that the Ex-change is justified in seeking to obtain wherever possible for the benefit of the investor such supplementary information as may assist him to a correct understand-ing of the accounts themselves. Applications for listing which involve questions relating to stock dividends will be considered in the light of the foregoing. In view of the large and constantly in-creasing number of listings on the Ex-change, either originating in stock divi-dends or involving questions that have to do with stock dividends, an effort will be made to obtain for the investor such infor-mation as may place him in the position to determine in connection with stock dividends received by him, to what extent they constitute true stock dividends rep-resenting the capitalization of current or past earnings, and to what extent, if at all, they represent merely split-ups in-volving an expression in a new form of what was already his. In any event, it is felt that the individual investor should make such independent investigations as seem desirable in order to be quite sure that he understands in each instance how he has been affected by the declaration of a stock dividend. When stock dividends are received by investment trusts, holding companies or Bulletin H A S K I N S & S E L L S 71 other corporations, the manner in which these dividends are accounted for by the receiving company presents a problem somewhat different from that attending the accounting for the payment of stock dividends by the declaring company. Cur-rent practice varies all the way from the policy of ignoring stock dividends in their entirety in the income account of receiving companies, to the policy of taking them into the income account whether they have been realized upon or not at the full market value on the date received. Uniform accounting practice today seems to favor as sound procedure the ignoring of stock dividends in the income account of receiving companies. However, it has been urged on behalf of investment trusts, hold-ing companies and others, with what seems to us to be some measure of justi-fication, that a technical interpretation of the nature of stock dividends may operate to hamper management in the adopting of perfectly reasonable and proper dividend programs of their own, whether in cash or in stock, and may even under certain cir-cumstances force them as recipients, for technical reasons, to realize upon stock dividends which for business reasons they would have preferred to hold. It may be that accounting practice will undergo certain modifications in the light of these new tendencies, but it is too early to form an opinion as to the direction that this modification is apt to take. It is possible that a schedule of all stock divi-dends received will suggest itself as a desirable addition to the annual report of investment trusts, holding companies and others; or, conceivably, a new departure in accounting theory may permit the in-clusion of stock dividends in some form or other in the income accounts of receiving companies. At the present time, it appears as if the Exchange could go no further than to take the position that it will raise no objection to the method by which investment trusts, holding companies and others account for stock dividends received by them and not realized upon, provided there is the fullest disclosure of the procedure adopted, and provided that these are not included in the income accounts of the receiving com-panies at a greater dollar value per share than that at which they have been charged to income account or earned surplus ac-count by the paying companies. The manner in which receiving companies ac-count for stock dividends received by them and realized upon during the period under review is a matter which the committee will pass on in connection with each specific instance. RICHARD W H I T N E Y , F R A N K ALTSCHUL, R OLA ND L . REDMOND, J . M . B . H O X S E Y , September 4, 1929. Recommended to the Governing Com-mittee by a joint meeting of the Law Committee and the Committee on Stock List, held September 9th, 1929. A S H B E L G R E E N , Secretary. Adopted by the Governing Committee, September 11, 1929. A S H B E L G R E E N , Secretary. 

Report of the Special Committee on Stock Dividends New York Stock Exchange

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Report of the Special Committee on Stock Dividends New York Stock Exchange

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