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9.3 Treasury stock
Publication date: 31 Dec 2021
us Financing guide
As discussed in ASC 505-30, Treasury Stock, when a reporting entity repurchases its common shares it may account for the shares as treasury stock or retire them. See FG 9.4 for information on share retirement.
ASC 505-30-30-6 provides guidance on recording treasury stock.
Once the cost of the treasury shares is determined under the requirements of this Section, and if a corporation’s stock is acquired for purposes other than retirement (formal or constructive), or if ultimate disposition has not yet been decided, paragraph 505-30-45-1 permits the cost of acquired stock to either be shown separately as a deduction from the total of capital stock, additional paid-in capital, and retained earnings, or be accorded the following accounting treatment appropriate for retired stock.
However, when a reporting entity acquires its own stock, it should consult with its legal counsel to determine if the laws in the state of incorporation are different than the requirements under ASC 505-30. In such instances, ASC 505-30-25-2 indicates the reporting entity should apply the accounting dictated by the applicable laws.
Laws of some states govern the circumstances under which an entity may acquire its own stock and prescribe the accounting treatment therefor. If such requirements are at variance with the requirements of paragraphs 505-30-25-7 and 505-30-30-6 through 30-10, the accounting shall conform to the applicable law.
9.3.1 Accounting for the purchase of treasury stock
A reporting entity should recognize treasury stock based on the amount paid to repurchase its shares. It should be recorded as a reduction of stockholders’ equity (i.e., as a contra-equity account). Since treasury stock is not considered outstanding for share count purposes, it should be excluded from average common shares outstanding for basic and diluted earnings per share.
Although the cost of the treasury stock is generally the price paid for the shares, a reporting entity should consider whether the price paid for the shares includes payment for other agreements, rights, and privileges. See FG 9.3.4 for further information on multiple element treasury stock transactions. Direct costs incurred to acquire treasury stock should be treated like stock issue costs and added to the cost of the treasury stock by analogy to the guidance provided in the AICPA Q&A Section 4110.09.
9.3.2 Accounting for reissuance of treasury stock
When a reporting entity reissues treasury stock at an amount greater (less) than it paid to repurchase the shares (based on its policy such as average cost, FIFO, LIFO, or specific identification), it realizes a gain (loss) on the reissuance of the shares. This gain or loss should be recognized in shareholders’ equity, not net income. A gain on the reissuance of treasury shares should be credited to additional paid-in capital. A loss on the reissuance of treasury shares may be debited to additional paid-in capital to the extent previous net gains from sales or retirements of the same class of stock are included in additional paid-in capital. Any losses in excess of that amount should be charged to retained earnings.
9.3.3 Application example
Example FG 9-3 illustrates the accounting for the purchase and subsequent reissuance of treasury stock.
EXAMPLE FG 9-3
Accounting for the purchase and subsequent reissuance of treasury stock
Accounting for the purchase and subsequent reissuance of treasury stock
FG Corp repurchases 2,000 shares of its common stock at a price of $40 per share. The shares are recorded as treasury stock and are not formally retired.
Six months after purchasing the treasury shares, FG Corp reissues 1,000 shares of treasury stock at a price of $45 per share. The remaining 1,000 shares of treasury stock are reissued two months after that at a price of $28 per share.
How should FG Corp account for the purchase and reissuance of treasury stock?
Analysis
When FG Corp executes the treasury stock purchase, it should record the treasury shares based on its cost (2,000 shares x $40) by recording the following journal entry.
Dr. Treasury stock |
$80,000 |
|
Cr. Cash |
$80,000 |
When FG Corp reissues 1,000 shares of treasury stock for $45 per share, it should reduce treasury stock for an amount equal to the initial cost and record the reissuance gain in additional paid-in capital (1,000 shares x $5) by recording the following journal entry.
Dr. Cash |
$45,000 |
|
Cr. Treasury stock |
$40,000 |
|
Cr. Additional paid-in capital |
$5,000 |
When FG Corp reissues the remaining 1,000 shares of treasury stock at $28 per share, it should reduce treasury stock at an amount equal to its initial cost (1,000 shares x $40) and record the reissuance loss in additional paid-in capital to the extent of prior reissuance gains ($5,000). The remaining reissuance loss [(1,000 shares x ($40-$28)) - $5,000] should be charged to retained earnings by recording the following journal entry.
Dr. Cash |
$28,000 |
|
Dr. Additional paid-in capital |
$5,000 |
|
Dr. Retained earnings |
$7,000 |
|
Cr. Treasury stock |
$40,000 |
Question FG 9-1 discusses how a reporting entity with an accumulated deficit should record a loss on the reissuance of treasury stock.
Question FG 9-1
How should a reporting entity with an accumulated deficit record a loss on the reissuance of treasury stock?
How should a reporting entity with an accumulated deficit record a loss on the reissuance of treasury stock?
PwC response
We believe a reporting entity with an accumulated deficit should analogize to the guidance in SAB Topic 3.C, Redeemable Preferred Stock (as codified in ASC 480-10-S99-2), and record a loss on the reissuance of treasury stock to additional paid-in capital until there is none left. Once additional paid-in capital has been depleted, additional losses should be recorded by increasing the accumulated deficit.
9.3.4 Multiple element treasury stock transactions
Sometimes, the facts and circumstances of a share repurchase suggest that the transaction involves more than the purchase of treasury stock. For example, a reporting entity may repurchase shares at a price greater, or less than, fair value. As discussed in ASC 505-30-30-3, when a reporting entity pays more than the fair value of the acquired treasury stock, the excess should be attributed to the other elements of the transaction.
For example, the selling shareholder may agree to abandon certain acquisition plans, forego other planned transactions, settle litigation, settle employment contracts, or restrict voluntarily the ability to purchase shares of the entity or its affiliates within a stated time period. If the purchase of treasury shares includes the receipt of stated or unstated rights, privileges, or agreements in addition to the capital stock, only the amount representing the fair value of the treasury shares at the date the major terms of the agreement to purchase the shares are reached shall be accounted for as the cost of the shares acquired. The price paid in excess of the amount accounted for as the cost of the treasury shares shall be attributed to the other elements of the transaction and accounted for according to their substance. If the fair value of those other elements of the transaction is more clearly evident, for example, because the entity’s shares are not publicly traded, that amount shall be assigned to those elements and the difference recorded as the cost of treasury shares. If no stated or unstated consideration in addition to the capital stock can be identified, the entire purchase price shall be accounted for as the cost of treasury shares.
In a multiple element treasury stock arrangement, the cost of a public company’s treasury stock should generally be the quoted market price of the shares. The SEC staff has generally objected to the use of other valuation methods. The cost of private company shares may be more subjective. A reporting entity should consider the facts and circumstances of the transaction including the relative observability of the fair value of the elements of the transaction.
If there are no other elements to be accounted for separately, we believe the entire amount paid by the reporting entity to acquire treasury shares should be included in the recorded cost.
9.3.4.1 Treasury stock transactions involving a standstill agreement
A reporting entity may enter into a standstill agreement as a hostile takeover defense mechanism. A standstill agreement precludes a hostile bidder from purchasing additional shares of the reporting entity’s stock for a specified period of time.
Often, the reporting entity also agrees to repurchase its shares from the bidder at a later date, typically at a premium. These agreements are commonly referred to as “greenmail transactions.” When a reporting entity agrees to buy back its shares at a premium, it should separate the amount paid into (1) the cost to defend itself from a takeover attempt, and (2) the cost to repurchase its shares. Costs incurred to defend itself from a takeover attempt, including any premium paid to a hostile bidder, should be expensed as incurred, as required by ASC 505-30-25-4, as normal operating costs.
9.3.4.2 Litigation settlements involving the purchase of shares
A litigation settlement may involve a purchase of shares. For example, a reporting entity may purchase its shares from an existing shareholder at a price in excess of its then fair value at the time it agrees to settle pending litigation. If the substance of an arrangement is that the reporting entity is settling litigation with a shareholder, then the excess value should be attributed to the litigation settlement. See FG 9.3.4 for information on multiple element treasury stock transactions.
9.3.4.3 Repurchases of stock held by employees at other than fair value
When a reporting entity repurchases its shares from employees as part of an employee stock ownership or other arrangement, the reporting entity should assess whether the price paid results in compensation expense. See SC 4.8.1 for information on repurchases of stock held by an employee.
9.3.5 Dividends on treasury stock
Typically, cash dividends are not declared and paid on treasury stock unless the treasury shares are underlying a forward share repurchase contract. If a reporting entity does declare a cash dividend on treasury stock that it holds, the dividend should be deducted from the dividend distribution and should not be recorded as investment income. That is, the entry to charge retained earnings and credit cash for the dividends paid on treasury stock is eliminated since the cash remains with the reporting entity.
9.3.5.1 Stock dividends on treasury stock
Applicable state laws govern the issuance of stock dividends on treasury stock. Some statutes prohibit this practice. When treasury stock is not retired and is held with the expectation that it will be reissued for a specific purpose (e.g., stock option, purchase, or bonus plans), it may be important to maintain the same ratio of treasury shares to total shares outstanding before and after a stock dividend. In that case, issuance of a stock dividend on treasury stock may be appropriate if permitted by law. When the ratio of treasury shares to total shares does not need to be retained, issuance of stock dividends on the treasury stock is not necessary.
We believe a reporting entity should record the dividend using the legal minimum (par value). However, in some cases, recording a stock dividend at the legal minimum may conflict with stock exchange or regulatory authority requirements. In that case, the reporting entity may record the dividend applicable to treasury stock at the fair value of the shares paid as a dividend. See FG 4.4.4 and FG 7.7.1 for further information on stock dividends.
The cost basis of shares recorded as treasury stock does not change based on how the reporting entity recorded the dividend. The original cost to acquire the treasury stock should be allocated to the total number of shares held in treasury, including the dividend shares.
9.3.6 Treasury stock issued to pay a stock dividend
When treasury stock is issued to pay all or a portion of a stock dividend, the dividend should be recorded at an amount equal to the fair value of the shares on the dividend declaration date. The reissuance of the treasury shares should be accounted for in the same manner as other reissuances of treasury stock. See FG 9.3.2 for information on the reissuance of treasury stock.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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