If a company carries out a share buyback, there are two ways of accounting for treasury stock:. The key difference between the two methods is the treatment of gains or losses arising from the share repurchase. You can find information on treasury stock in the consolidated balance sheet of a company. Here, treasury stock has a negative balance and reduces total equity.
When a company initially issues stock, the equity section of the balance sheet is increased through a credit to the common stock and the additional paid-in capital APIC accounts. The common stock account reflects the par value of the shares, while the APIC account shows the excess value received over the par value. Due to double-entry bookkeeping , the offset of this journal entry is a debit to increase cash or other asset in the amount of the consideration received by the shareholders.
Treasury shares reduce total shareholders' equity and are generally labeled as "treasury stock" or "equity reduction". There are two methods of accounting for treasury stock: the cost method and the par value method. The cost method uses the value paid by the company during the repurchase of the shares and ignores their par value; under this method, the cost of the treasury stock is included within the Stockholders' Equity portion of the balance sheet.
Under the cash method, at the time of the share repurchase, the treasury stock account is debited to decrease total shareholder's equity. The cash account is credited to record the expenditure of company cash. If the treasury stock is later resold, the cash account is increased through a debit and the treasury stock account is decreased, increasing total shareholder's equity, through a credit.
In addition, a treasury paid-in capital account is either debited or credited depending on whether the stock was resold at a loss or a gain. Under the par value method, at the time of share repurchase, the treasury stock account is debited, to decrease total shareholder's equity, in the amount of the par value of the shares being repurchased.
The common stock APIC account is also debited to decrease it by the amount originally paid in excess of par value by the shareholders. The cash account is credited in the total amount paid out by the company for the share repurchase.
The net amount is included as either a debit or credit to the treasury APIC account, depending on whether the company paid more when repurchasing the stock than the shareholders did originally.
ABC Company has excess cash and believes its stock is trading below its intrinsic value. The repurchase creates a treasury stock contra equity account. Retired shares are treasury shares that have been repurchased by the issuer out of the company's retained earnings and permanently canceled meaning that they cannot be reissued later.
They have no market value and no longer represent a share of ownership in the issuing corporation. The cost method uses the value paid by the company during the repurchase of the shares and ignores their par value.
Under this method, the cost of the treasury stock is included within the stockholders' equity portion of the balance sheet. The treasury stock line item is usually placed at or near the end of the line items within the equity section, but there is no official presentation guideline mandating that it must be placed in that position. Thus, there is no reason why the treasury stock line item cannot be positioned anywhere within the equity section of the balance sheet. The Balance Sheet.
Accounting Books. Treasury stock buyback schemes can sometimes destroy value. This might happen if a firm pays too much for their own shares or issue shares to pay for acquisitions when those shares are undervalued. Though not entirely related to treasury stock, one of the most famous ill-timed examples to come out of corporate America in recent years was a deal in which the former Kraft Foods, spun out of Philip Morris, acquired Cadbury PLC.
One of the largest examples you'll ever see of treasury stock on a balance sheet is Exxon Mobil Corp. Rockefeller's Standard Oil empire. Exxon Mobil has a policy of giving back surplus cash flow to owners through a mixture of dividends and share buybacks and keeping the stock with plans to use it again. Every decade or two, it buys a major energy firm. Exxon pays for the deal with stock. It's a win-win for all parties involved. The owners of the acquisition target those who want to stay invested and don't have to pay capital gains tax from the merger.
The owners of Exxon Mobil end up with the economic equivalent of an all-cash deal and their ownership percentage gets restored. Exxon uses the cash flow from its older and newly gained earnings streams to rebuild its treasury stock position. From time to time, certain talks take place in the finance industry as to whether or not it would be a good idea to change the rules for how firms carry treasury stock on the balance sheet.
At present, treasury stock is carried at historical cost. Some think it should reflect the current market value of the firm's shares. At least, in theory, the firm could sell the shares on the open market for that price or use them to buy other firms, converting them back into cash or useful assets. This thinking has yet to prevail.
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