The Acquisition of Treasury Stock by a Corporation: How It Works and Why Companies Do It

Companies acquire treasury stock for several reasons, including to return cash to shareholders through stock buybacks, to reduce the number of outstanding shares, and to increase earnings per share.

This practice can be beneficial for shareholders, as it can increase the value of their shares.

Treasury stock refers to previously outstanding stock that was bought back from stockholders by the issuing company.

The total number of outstanding shares on the open market decreases when a company buys back treasury stock.

Treasury stock remains issued but is not included in the distribution of dividends.

The company reacquires treasury stock to decrease the number of shares in public circulation.

Treasury stock is also referred to as treasury shares or reacquired stock.

The acquisition process of treasury stock involves buying back shares from the open market at the current market price. This was the case for Upbeat, which bought back 4 million shares at $30 a share, costing $120 million.

The company debits "Treasury Stock" for the same amount, reducing shareholders' equity. This is because treasury stock represents the number of shares repurchased from the open market.

The transaction is credited to "Cash", which means the company uses its funds to buy back the shares.

Treasury stock is a contra equity account recorded in the shareholders' equity section of the balance sheet.

It represents the number of shares repurchased from the open market, reducing shareholders' equity by the amount paid for the stock.

Treasury shares have no voting rights and don't receive dividends, which can be a significant consideration for investors.

The amount of treasury stock repurchased by a company may be limited by its nation's regulatory body, like the Securities and Exchange Commission (SEC) in the United States.

Treasury stock can be retired or held for resale in the open market, with retired shares permanently canceled and unable to be reissued later.

Companies often reacquire shares through a tender offer or direct repurchase, which involves buying shares back from investors at a premium or market price.

A direct repurchase is simply buying shares on the secondary market like regular investors do.

Subchapter V offers a more streamlined and cost-effective process for acquiring assets, specifically for businesses with less than $7.5 million in liabilities.

This subchapter allows for a more informal and less formal process, reducing the need for lengthy court proceedings.

The debtor can propose a plan to reorganize or liquidate the business, which must be approved by the court.

The court's approval is not required for the plan's implementation, giving the debtor more control over the process.

Subchapter V plans are designed to be completed within 5 years, providing a sense of urgency and focus for the debtor.

The plan must be submitted to the court and creditors, who then have 45 days to object.

Accounting for treasury stock is a crucial aspect of corporate finance. There are two primary methods of accounting for treasury stock: the cost method and the par value method.

The cost method is the most commonly used approach, where the repurchase of shares is recorded by debiting the treasury stock account by the cost of purchase, ignoring the par value of the shares. This method is straightforward and easy to implement.

Under the par value method, share buybacks are recorded by debiting the treasury stock account by the shares' total par value, crediting the cash account for the amount paid to purchase the treasury stock, and offsetting the applicable additional paid-in capital (APIC) or discount on capital.

Here's a summary of the accounting treatment for treasury stock under both methods:

The choice of accounting method depends on the company's specific circumstances and accounting policies.

Accounting for treasury stock involves two primary methods: the cost method and the par value method. The cost method values treasury stock according to the price the company paid to repurchase the shares, as opposed to the par value.

The cost method is the most commonly used method by most public entities and uses the value paid by the company during the repurchase of the shares, ignoring their par value. The cost of the treasury stock is included within the stockholders' equity portion of the balance sheet under this method.

Under the cost method, the repurchase of shares is recorded by debiting the treasury stock account by the cost of purchase. The cash account is credited for the amount paid to purchase the treasury stock. If the treasury stock is resold later, the cash account is increased through a debit while the treasury stock account is decreased.

The par value method values shares according to their par value at the time of repurchase. This sum is debited from the treasury stock account, to decrease total shareholders' equity. The common stock APIC account is also debited by the amount originally paid in excess of par value by the shareholders.

Here are the key differences between the cost method and the par value method:

Treasury stock can either be in the form of retired treasury stock or non-retired treasury stock. Retired treasury stock is permanently retired and cannot be re-instated on a later date, while non-retired treasury stock is held by the company for the time being, with the optionality to be re-issued at a later date if deemed appropriate.

To calculate the fully diluted number of shares outstanding, we use the treasury stock method (TSM). This approach assumes that holders will exercise options that are currently "in-the-money" - meaning the strike price is greater than the current share price.

Options are examples of potentially dilutive securities. Employee stock options, warrants, and restricted stock units (RSUs) also fall into this category. These securities can potentially increase the number of shares outstanding, thereby diluting the ownership percentage of existing shareholders.

Under the TSM, the proceeds from exercising dilutive securities are assumed to be used immediately to repurchase shares at the current share price. This is a key assumption in the calculation.

The TSM approach has two main treatments for outstanding options. The standard approach is to include only options that are currently in the money. However, in practice, it's more common to include all outstanding options, regardless of whether they're in or out of the money.

The intuition behind this more prevalent treatment is that all outstanding options will eventually be in the money, so it's a conservative measure to include them all in the diluted share count.

A share buyback is a common practice where a company uses its excess cash to repurchase its own shares from the market. This can have a positive effect on the share price, as it reduces the number of shares outstanding and increases the value of each remaining share.

By buying back shares, a company can send a signal to the market that its shares are undervalued, which can boost investor confidence. This is especially true if the company's share price has fallen in recent periods.

Share buybacks can also be used as a defensive tactic to fend off hostile takeover attempts. By increasing the value of shareholders' interests, a company can make it more difficult for a potential acquirer to gain control.

One common reason behind a share repurchase is for existing shareholders to retain greater control of the company. This is achieved by increasing the value of their shares and voting rights.

Here are some examples of securities that can be considered dilutive:

These securities can dilute the ownership percentage of existing shareholders, making it easier for a potential acquirer to gain control.

When a company buys back its own shares, it's known as a share buyback, and it can have a significant impact on the company's balance sheet.

The cost method of accounting for treasury stock values the shares according to the price the company paid to repurchase them, listed in the stockholders' equity portion of the balance sheet.

The par value method, on the other hand, values shares according to their par value at the time of repurchase, which is debited from the treasury stock account and decreases total shareholders' equity.

The repurchased shares are no longer included in the calculation of basic or diluted earnings per share (EPS), nor are they included in the distribution of dividends to equity shareholders.

The repurchased shares also do not retain the voting rights previously given to the shareholder.

The rationale for share repurchases is often that management believes the share price is undervalued, and the repurchase can send a positive signal to the market.

The company's excess cash is utilized to return some capital to equity shareholders, rather than issuing a dividend.

If the shares are priced correctly, the repurchase should not have a material impact on the share price.

The actual share price impact comes down to how the market perceives the repurchase itself.

The treasury stock method (TSM) is used to calculate the fully diluted number of shares outstanding, and it assumes that options currently "in-the-money" are exercised by the holders.

However, in practice, all outstanding options are often included in the calculation, regardless of whether they are in or out of the money.

The accounting equation shows that adding treasury stock will weaken the company's balance sheet in the short-term, as the company has to pay for its own stock with an asset (cash), thereby reducing its equity by an equivalent amount.

Here's a summary of the accounting treatment for treasury stock:

A company's charter specifies the number of authorized shares it can sell to investors, which is often a larger number than the shares actually sold.

Authorized shares are the maximum amount of stock a company can issue.

The shares sold in a public stock offering are referred to as issued shares, and the company may reserve some authorized shares for future use.

Issued shares and outstanding shares are often the same, but if a company buys back shares, they become treasury stock and are no longer outstanding.

The number of outstanding shares is used to calculate key metrics like earnings per share.

Here's a breakdown of these terms:

Treasury stock, on the other hand, is the shares a company buys back from investors, which are issued but no longer outstanding.

Reissuance of Treasury Stock can be a complex process, but it's essential to understand the different scenarios that can arise.

If a company decides to sell its treasury stock at a profit, the proceeds of the transaction result in a debit to cash, as seen in Upbeat's case where the stock was sold at $42 per share. This resulted in a $168 million debit to cash.

The entire balance of the treasury stock is credited back to the company, as all the treasury stock is liquidated. This means the $120 million balance is credited back to the company.

However, if the company sells its treasury stock at a loss, as happened when Upbeat sold its shares at $25, the company incurs a loss. The debit to cash is lower, only $100 million, and the remaining $20 million is debited to Retained Earnings, reflecting the loss of stockholders' equity.

The credit to the Treasury Stock account remains the same, $120 million, regardless of the sale price. This highlights the importance of accurately valuing treasury stock to avoid unexpected losses.