Accounting

Buybacks: Why Does A Company Buy Back Its Own Shares

Why does a company buy back (repurchase) its own shares? The answer may be many but my answer to stock repurchase in short is- A company may decrease the number of shares issued in the market by buying back some of its own shares. The extent to which a company may buy back its own shares and the frequency with which it may do so are generally governed by specific laws within a jurisdiction.

A key feature of such regulations is the protection of creditors. Companies may undertake a share buy back to:

• increase the worth per share of the remaining shares

• manage the capital structure by reducing equity

• most efficiently manage surplus funds held by the company, rather than pay a dividend or reinvest in other ventures.

IFRSs do not prescribe any accounting treatment for share buybacks.

Consider the situation where an entity has issued the following no-par shares over a period of years:

200 000 shares at $1.00          $ 200 000

100 000 shares at $1.50              150 000

200 000 shares at $2.00            400 000

500 000 shares                             $750 000

Assume the total equity of the entity consists of:

Share capital                                $ 750 000

Asset revaluation surplus             20 000

Retained earnings                         230 000

$ 1 000 000

If the company now buys back 50 000 shares for $2.20 per share, a total of $110 000, what accounts should be affected by the buy back? Is it necessary to determine which shares from past issues have been repurchased?

In essence, the composition of the $1 million equity of the entity is relatively unimportant — it is all equity. The composition is only important if there are tax or dividend distribution issues associated with particular accounts. In the absence of such considerations, whether the equity is share capital or retained earnings is irrelevant.

Hence, in accounting for the share buy back, it is immaterial what accounts are affected. The $ 110 000 write-off could conceivably be taken totally against share capital or retained earnings, or proportionally against all three components of equity.

In some countries, when shares are reacquired (repurchased), they are held in treasury for reissue instead of being cancelled. Such shares are called  ‘treasury shares’ or ‘treasury shares’ . They are essentially the same as unissued share capital.

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