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as a deduction from capital account at the amount paid therefor. The number of treasury shares would also be deducted from the total shares outstanding.

In presenting the capital account in the corporation statements the important thing is to show the number of shares issued and outstanding, with the value of these shares as reflected by the books or the statements in question.

In examining the published reports of certain companies issuing stock with no par value it was noted in a few instances that an attempt was made to show the amount of capital issued against various properties included in the assets of the corporation. This practice would not have been followed in the case of stock issued, say, with par value of $100, and I can see no good reason for stating it in that manner where the stock issued has no nominal or par value. As each share of stock without par value represents an equal portion of the capital, there cannot be any great advantage in setting up the capital account in this way.

The fact that certain states provide in their statutes for a stated capital does not mean that such stated capital must be set out separately on the books of the corporation or its published statements. It does signify, however, that the directors may not incur debts until such stated capital is paid in. It may be good practice, however, to indicate by a note or indention on the balance-sheet the amount of the stated capital, but no good reason exists for separating the actual capital paid in into two or more divisions.

The following arrangement for the balance-sheet is suggested: Capital (declared $600,000) 7% cumulative convertible pre

ferred stock, 5,000 shares of
$100 each

$500,000.00
Balance represented by 9,875
shares of common stock without

764,210.87

par value

Total paid-in capital Earned surplus

$1,264,210.87
1,362,984.75

Total capital

$2,627,195.62 It would appear that an unusual opportunity presents itself to us to familiarize ourselves with the advantages and workings of this law, with a view to recommending whenever possible, in the formation of new enterprises, that stock be issued without par value. Anything that tends to get nearer the facts should appeal to the imagination of and be encouraged by the accountant.

Consolidated Accounts*

By GEORGE R. WEBSTER

The need for consolidated accounts practically started with the era of the holding company, although there were, of course, prior to that time many corporations which had formed subsidiary companies in order to comply with the requirements of state laws, and for other reasons. Probably the first important consolidated accounts to be published were those of the United States Steel Corporation in 1902.

The accounts of a corporation should be prepared so that the auditor can certify that the balance-sheet represents the true financial position of the company, and that the profit and loss account is a fair statement of the result of the company's operations. It has long been recognized by accountants that in the case of corporations with subsidiary companies these two conditions can only be shown by the preparation of consolidated accounts. If bankers had insisted on the preparation of such accounts they would probably have avoided several unpleasant experiences.

If advances are made by a holding company to a subsidiary company or if the subsidiary company borrows money or incurs outside liabilities these liabilities of the subsidiary company may be represented on its books by current assets, capital expenditure or even by losses or by a combination of these items, and it is only by consolidation that the true financial position of the companies can be shown. Cases have been known where the current liabilities of the holding company were almost negligible but where consolidated accounts showed current liabilities largely in excess of current assets.

It is also possible for holding companies to take into their profit and loss accounts dividends from such subsidiary companies as are making profits and to make no provision for losses made by other subsidiary companies. No accountant should, of course, certify such a statement without a qualification, but even if losses are provided for and the profit and loss account is correctly stated, the balance-sheet of the holding company does not show the true financial position of the holding company and its subsidiary companies. In several notorious cases balance-sheets of holding companies have been issued which did not show any contingent liability for endorsement of notes of subsidiary companies, although these amounted to very considerable sums. The consolidated accounts in such cases would, of course, have shown the obligations of the company and its subsidiary companies and the assets against them.

*A paper read at the annual meeting of the American Institute of Accountants, Cincinnati, Ohio, September 17, 1919.

However, it is not necessary to discuss at length with accountants the need for consolidation. Those members of the institute who are not convinced on this point can refer to excellent papers on the subject by W. M. Lybrand and others as well as to standard text-books.

For a time many lawyers were opposed to the presentation of consolidated accounts by companies to their stockholders, but the leading lawyers engaged in corporation practice have long since recognized that the technical legal situation is less important to stockholders and the public than the substantial position and have accordingly accepted the principle of consolidated accounts.

The federal reserve board has taken occasion to point out to banks which are members of the system that they do not get an adequate view of the financial condition of a company which has subsidiaries unless they secure consolidated accounts.

The income tax law and regulations now require the submission of consolidated returns under certain conditions. The development of this requirement is very interesting.

The English finance act of 1915 contained a provision for consolidation in the following terms:

Where any company, either in its own name or that of a nominee, owns the whole of the ordinary capital of any other company carrying on the same trade or business or so much of that capital as under the general law a single shareholder can legally own, the provisions of part III of this act as to excess profits duty and the pre-war standard of profits shall apply as if that other company were a branch of the first-named company, and the profits of the two companies shall not be separately assessed.

Our revenue act of 1917 contained no mention of consolidated returns, but before the regulations were issued the American Institute of Accountants submitted a brief strongly advocating consolidated returns. The brief was published in THE JOURNAL OF ACCOUNTANCY of January, 1919. The full brief should be carefully read, but the following excerpts may be quoted :

If the rule which we advocate (consolidated returns) be adopted the tax will be based on the real facts and determined by the relation between true income and the true investment of the group of companies as a whole; and the latter course (consolidated returns) would impose no additional burdens on anyone, since it is the course followed for all practical purposes by the corporations themselves and recognized by bankers, economists and accountants as the only course which reveals the true situation.

The regulations subsequently issued provided that "whenever necessary to more equitably determine the invested capital or taxable income the commissioner of internal revenue may require corporations classified as affiliated under article 77 to furnish a consolidated return of net income and invested capital." Subsequently, a treasury decision was issued under which "affiliated corporations, as limited and defined in paragraphs C and D of the regulations are hereby directed to make consolidated returns for the purpose of excess profits tax.” In these regulations it was stated :

A. Two or more corporations are not "affiliated” merely because all or substantially all of the stock therein is owned by the same corporation, individual or partnership; they must also be engaged in the same or a closely related business.

Under the revenue law of 1918 consolidated returns were specifically mentioned in the act, which states that "corporations which are affiliated within the meaning of this section shall, under regulations to be prescribed by the commissioner

make a consolidated return of net income and invested capital.” The act stated that two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interest, or by a nominee or nominees, substantially all the stock of the other or others; or (2) if substantially all the stock of two or more domestic corporations is owned or controlled by the same interests. It will thus be seen that in the 1917 act no mention was made of consolidated returns but that the regulations provided for the consolidated returns of affiliated companies engaged in the same or closely related business, while the 1918 act specifically recognizes and calls for consolidated returns and makes the requisite the holding of all or substantially all the voting stock irrespective of whether the companies are engaged in similar businesses or not.

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