For years the SEC had required companies that experienced increases in their equity in subsidiaries due to a subsidiary stock issuance to enter that increase (or ‘gain’) in Paid-in Capital. In 1983, the SEC changed its views on this issue in Staff Accounting Bulletin No. 51 [SEC, 1983]. Following the conclusions of an AICPA Issues Paper on the subject, the Commission decided to offer companies the option of reporting such gains from subsidiary stock issuances either in capital or in income in consolidated financial statements. This treatment was later extended to stock issuances of nonconsolidated equity investees, and companies began reporting these gains in income. This paper critically examines the view taken in the Issues Paper and reflected in SAB 51, that gains on subsidiary stock issuances are similar in substance to gains realized when the parent sells part of its investment in the subsidiary It also reports on the treatment of these transactions in practice—and the window—dressing potential-by companies reporting them. We conclude that while a subsidiary stock issuance is similar in many respects to a parent's sale of its subsidiary's stock, there are important differences. Moreover, the proper accounting may depend on the theory of consolidation adopted. Public reporting of these transactions is often inadequate, particularly with respect to tax effects (an unsettled area in which standard-setting may be needed) and footnote disclosure.

Reviews the books "Foreign Exchange Risk Management under Statement 52, A Research Report," and "Determining the Functional Currency under Statement 52, A Research Report," by Thomas G. Evans and Timothy S. Doupnik.

Although many firms now prepare a cash-based statement of changes in financial position, reported "funds from operations" is typically a measurement of working capital. The statement reader wishing to determine cash flow from operations must use a series of indirect adjustments to do so. Our purpose in this paper is to identify the inherent difficulties the reader encounters when using this indirect method to convert reported funds from operations to a cash flow amount. We demonstrate how the indirect method will in fact not equal actual cash flow from operations because of numerous conceptual and practical problems encountered when applying the necessary adjustments. We develop illustrations of these problems, and we show how cash flow from operations calculated by the indirect method is, at best, an estimate of actual cash provided by operations.

In a provocative but rarely cited article, Anderson [1977] examined the potential implications of efficient capital markets research for auditors' legal liability under the common law. He concludes that if common law courts understand and apply the findings of efficient markets research in their deliberations, the class of potential plaintiffs may be enlarged, but auditors' overall economic liability for damages may be reduced. The present article criticizes certain of Anderson's conclusions in the common law context and questions the relevance of his analysis because (1) investors' suits against auditors of publicly-held companies generally are brought under federal statutory law--the Securities Act of 1933 and the Securities Exchange Act of 1934--and (2) the class of publicly-held securities investigated by efficient markets research is generally also subject to the 1934 Act. Some federal courts applying the 1934 Act have already implicitly acknowledged market efficiency by allowing plaintiffs to show indirect "market reliance" rather than prove direct reliance on a specific representation made by the auditor. Thus we find that introducing knowledge of market efficiency into the legal system will probably not have the far-reaching effects contemplated by Anderson.

The relationship between Federal Reserve margin requirements and the behavior of stock prices has long been of interest to academicians and investors. This paper reports the results of a study of price movements around times when margins were changed. Using data from the 1933-69 period, the study concludes that increases in margin appear, at most, to have a trivial depressing influence on stock prices, which takes place over a number of days following the announcement of increases. Margin decreases, on the other hand, do not seem to have any significant impact on price behavior.