The Stockholders' Equity Section: Form Without Substance?

State laws governing a corporation's ability to make distributions to stockholders have evolved from the time when minimum legal capital was considered to be equivalent to the par value of the corporation's stock. The new concept is to restrict the ability of corporations to make distributions to stockholders based on an equity definition of insolvency and on the excess fair value of assets over liabilities. The traditional equivalency of minimum legal capital and par value no longer holds in many states, thereby rendering the traditional stockholders' equity presentation of par value, additional paid-in capital, and retained earnings obsolete. Today, reporting capital by source is irrelevant; a single line amount for stockholders' equity could be presented along with a footnote providing additional disclosures that are targeted to the new restrictions on distributions to stockholders. The notes to the financial statements should indicate if the corporation is complying with legal restrictions.