Summary of Share buy-back
- How to account for a share buyback?
- How to account for share repurchases?
- Where do share buybacks go on a balance sheet?
- What is the accounting standard for buyback?
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AI Overview
AI Overview
Accounting for a share buyback involves reducing cash and shareholders’ equity on the balance sheet by the amount paid for the shares
. Under the cost method, Treasury Stock (a contra-equity account) is debited for the total repurchase price, and Cash is credited. This reduces total outstanding shares and equity.
Key Accounting Steps:
Identify Cost: Determine the total cash outflow (Number of shares
×
×
price per share).
Record Transaction (Treasury Method):
Debit: Treasury Stock (for the full purchase price).
Credit: Cash.
Record Transaction (Retirement Method):
Debit: Common Stock (par value).
Debit: Additional Paid-in Capital (excess of original sale price over par).
Debit: Retained Earnings (any excess over original price).
Credit: Cash.
Financial Statement Impact:
Balance Sheet: Cash decreases, and total shareholder equity decreases.
Income Statement: No direct effect (not an expense).
Earnings Per Share (EPS): Increases, as fewer shares are outstanding.
Cash Flow Statement: Reported as a cash outflow within financing activities.
For private companies, strict legal compliance (e.g., in the UK, Companies Act 2006) is required to ensure the buyback is funded from distributable profits or a new share issue.
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Glossary
Share buy-back
One of the methods by which a company can reduce its issued capital and return value to shareholders. A company conducts a share buy-back by:
- Making an offer to shareholders to buy back their shares.
- Entering into a share buy-back agreement with accepting shareholders.
- Cancelling the shares that the company has bought back.
A share buy-back is an exception to the general rule that a company may not purchase shares in itself. The key feature of a buy-back is that shareholders to whom a buy-back offer is made can choose whether or not to sell their shares.
The Corporations Act 2001 (Cth) (CA 2001) sets out the types of share buy-back a company may undertake, as follows:
A company wishing to undertake any one of the above types of share buy-back must comply with the CA 2001 when doing so (see section 256A and sections 257B-257J of the CA 2001).
Another commonly used method by which a company can reduce its share capital is through a reduction of share capital. Unlike a share buy-back, a reduction of share capital allows a company to reduce its issued capital without the need for each individual shareholder’s consent. A company’s decision on whether to undertake a share buy-back or a reduction of share capital is often driven in part by tax considerations.
For information about share buy-backs, see Practice notes, Share buy-backs: unlisted companies and Share buy-backs: ASX-listed companies.
For information about reductions of share capital, see Practice notes, Reduction of share capital: unlisted companies and Reduction of share capital: ASX-listed companies.
For a guide to all of Practical Law’s resources on returning value to a company’s members by way of dividend, share buy-back and share capital reduction, see Toolkit, Returns of value to members.
See also Practical Law’s topic: Share buy-backs.