BUS601: Financial Management

Companies will sometimes buy back their own shares, often done to try to stabilize their share price or improve certain financial ratios, such as earnings per share. A share may also be repurchased as a way to return excess cash to shareholders without having to pay a dividend. Additionally, there may also be certain strategic benefits in repurchasing shares. Whatever the reason, the result is the same: the shares are no longer outstanding. After repurchase, the shares may continue to be held by the company as issued shares, which are referred to as treasury shares, or they may be canceled. If they are held as treasury shares, they may be resold at a later date to new shareholders. However, if the shares are canceled, then they must be completely removed from the accounting records. Note that some jurisdictions do not allow treasury shares, meaning that any repurchased shares must be immediately canceled. We will examine the reacquisition of shares for both cancelation and non-cancelation situations below.

Shares Repurchased and Canceled

The IFRS does not provide any specific guidance on how to account for the repurchase of shares. However, ASPE does provide a set of steps to apply when shares are either repurchased or canceled. These procedures contemplate two possible situations:

In part (b), the balance is included as an increase to contributed surplus because it wouldn't be appropriate to report income from a share capital transaction. Also, note that where the shares are not par value shares, the assigned value indicated above is calculated as the weighted average cost of the shares at the transaction date.

The following illustration demonstrates the above rules:

On January 1, 2021, a company had 100,000, no-par value common shares outstanding that were issued for total proceeds of $1,060,000. There was no contributed surplus associated with these shares on that date. On March 1, 2021, the company repurchased and canceled 8,000 of these shares at a cost of $8 per share. The journal entry would be:

General Journal
Date	Account/Explanation	PR	Debit	Credit
Mar 1	Common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .		84,800
	Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			64,000
	Contributed surplus . . . . . . . . . . . . . . . . . . . . . .			20,800

Note: The common shares are eliminated at their average cost. ($1,060,000 ÷ 100,000) = $10.60 per share; $10.60 per share × 8,000 shares = $84,800 The contributed surplus is calculated as ($10.60 − $8.00) × 8,000 shares = $20,800

On October 1, 2021, the company repurchased and canceled a further 11,000 shares at a cost of $14 per share. The journal entry would be:

General Journal
Date	Account/Explanation	PR	Debit	Credit
Oct 1	Common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . .		116,600
	Contributed surplus . . . . . . . . . . . . . . . . . . . . . . . . .		20,800
	Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . .		16,600
	Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .			154,000

The common shares are again eliminated at their new average cost: ($975,200 ÷ 92,000) = $10.60. The previous contributed surplus is fully utilized, with an additional excess amount being charged to retained earnings.

In some jurisdictions, such as the United Kingdom, there may be additional legal restrictions that influence the accounting for share repurchases and cancelations. For example, on a share repurchase a company may be required to reallocate part of the retained earnings balance to a capital redemption reserve. This is done to provide a level of protection to the company's creditors, as the capital redemption reserve is generally not available for use in subsequent dividend payments.

Shares Repurchased and Not Canceled

When a company repurchases its own shares, but doesn't cancel them, the returned shares are referred to as treasury shares. These shares are essentially held by the company to be issued at a later date. ASPE indicates a preference for what is known as the single-transaction method, which considers the repurchase, and subsequent reissuance of the shares, as a single transaction. In this case, treasury shares held at the balance sheet date that have not yet been re-issued or canceled are reported as a deduction from the total shareholders' equity. They cannot be considered an asset as the company is merely holding shares of itself. When the treasury shares are first acquired, the journal entry would simply require a debit to the treasury shares account and a credit to cash. If the shares are subsequently re-issued, then the treasury shares account will be credited and cash will be debited. Any difference will be allocated to contributed surplus or retained earnings in a process that is essentially the inverse of the cancelation journal entries shown previously. If the shares are subsequently canceled, rather than being reissued, then cancelation procedures outlined previously are followed.

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Source: Glenn Arnold and Suzanne Kyle, https://lifa1.lyryx.com/textbooks/ARNOLD_2/marketing/ArnoldKyle-IntermFinAcct-Vol2-2020A.pdf
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