Accounting for Buy Back of Shares

` TOPIC - ACCOUNTING FOR BUY BACK OF SHARES
A share buyback occurs when the company decided to buys its own outstanding shares from
its investor from the public or specific holders.This is also known as repurchase of its own
shares. (eFinanceManagement.com, 2019)After buy back, shares can either be retired or held
as treasury stock in the books of the company. The purpose of performing buy back are as
follows-:
1. The dilution of ownership in the firm reduced.
2. As the number of total outstanding shares is reduced, the relative position of each
investor become stronger.
3. Firm's financial metrics become better.
In year July 1996, guidance note on the same released “accounting for share buybacks“
AAG12 was also withdrawn following the cancellation of section 206PD of corporation law
and in prediction of the revoke of section 191(2)(ea.) of corporation law. The computation
and accounting treatment for the buy back of shares if any on discount or at premium is based
on AAG12 and it also provides guidance on accounting for related transaction costs. The
importance and relevance of general purpose financial reports will be undermined by this
AAG12. (Australian Securities and Investment Commission, 2007) It only deals with the buy
back of shares which forms part of equity, it does not deal with the shares which do not form
part of equity..
Shares to have a Par value are currently required by the Corporation Law. In November
1997,a no par value share regime form part in the proposals for the reforms of the
corporations law. In no par value regime will also has been applied by this consensus.
There are two methods for repurchase of shares-
1. The Cost method
2. The Constructive Retirement Method
Method -1: Using the cost method
Step 1- The number of share of stock company wants to buy back
Firstly, the company has to determine the number of shares wants to buy back and how much
money will be paying in cash for the shares. For instance:- If an entity wants to buy back
15000 shares of stock at $10 per share, company will pay out $150,000 in cash to the stock
holder in exchange of the shares of stock
Step 2- The transactions will be recorded in the treasury stock account
Company will label the debit as treasury stock (by the same amount paid to buy back the
shares) and credit the cash account. Using the above example of 15000 shares , company will
debit the treasury stock account by $150,000 and credit the cash account by the same amount.
(AccounitngTools.com, 2019)
A company cannot legally invest in its own stock that is why it is not treated as an assest.it is
a contra equity account. Treasury stock account is shown in the liability side of the balance
sheet under owner’s equity.

Step 3- Resell the stock
Company must have to retire all the shares that have been bought, if does not resell it. Cash
account will be debited for the sale amount, plus a credit for any additional paid-in capital in
the treasury account. Reselling the 15,000 shares in the example from step one at $12 per
share would mean you would notate the resale as a cash debit in the amount of $180,000,
along with an additional paid-in capital credit of $30,000 and a treasury stock credit of
$150,000.
Step 4- Retire the shares
The treasury stock account must need to be notated by the par value of the common stock for
the purpose of retiring the shares, which is the face value of shares
In the above instance, If the shares of stock had a par value of $1 each, company would list
the amount of $1*15000 = $15,000 as an additional paid in capital debit,
Method 2- Constructive Retirement Method
Step 1: Buyback the share as per the board decision
In this case, the amount of pay out is found out by multiplying the number of shares by the
price per shares. For Example : If a company is buying a back 10000 shares with a par value
of $1 originally sold for 15$ each per stock , the pay out amount will be $150000. (Hearst
Newspapers, LLC, 2019)
Step 2: Recording the Transaction as common stock
In the above case. 10000 shares with a par value of $1 would be listed as “common stock par
value $1” with the debit amount of $10000. As the shares of 10000 shares in the example
were originally sold at $12 per share, so the additional paid in capital amount would come to
$1100000. Out of 10000 shares bought back at $15, remaining $30000 will be noted as a
retained earnings debit and the cash credit would come to $150000.
Step 3: Then the common stock and additional paid in capital amounts will be
eliminated.
Using this particular method, the buyback of shares shall eliminate the common stock and the
amount paid as an additional so that the same can be written as a credit along with the
retained earnings.This particular method can only be used when the stock cannot be reissued.
Impairment of Asset
The Australian Accounting Standard Board (AASB) formed Accounting Standard AASB 136
Impairment of Assets. The main object of this standard is to prescribe a particular procedure
for the entity that the assets are not carried forward more than the recoverable value of the