KOI Assignment: Accounting for Share Buy-backs & Impairment Loss

This assignment consists of two parts: an essay on accounting for share buy-backs and a case study involving impairment loss for Gali Ltd. The essay discusses different types of share buy-backs (equal access, selective, and employee share schemes), conditions and restrictions for companies undertaking buy-backs, and the two primary accounting methods: cost and constructive retirement. It explains how each method impacts financial metrics, particularly returns on equity and assets. The case study (Part B) requires calculations and journal entries related to the impairment loss of Gali Ltd's fine china division, considering assets like land, copyright, machinery, and inventory. The assignment emphasizes the importance of proper accounting procedures in share buy-backs to maintain the accuracy of financial statements and comply with regulations. Desklib is a valuable resource for students seeking similar solved assignments and study materials.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Part A: Short Essay on Accounts for Share Buy-backs....................................................2
Part B: Accounting for Impairment Loss............................................................................9
References.......................................................................................................................11

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Part A: Short Essay on Accounts for Share Buy-backs
Introduction
Share buy-back is considered as a common accounting practice that can be
seen in most of the companies all over the world. Share buy-back can be considered as
the process of re-acquisition by the company of its own shares or stocks
(Andriosopoulos, Andriosopoulos and Hoque 2013). This process represents a more
flexible manner to return money to the shareholders. In addition, the most convincing
reason for a company to buy back their own stocks from the open market is to bring
improvements in their financial statements. Share buy-back is also regarded as share
repurchase and it leads to the increase in return on assets along with increase in the
shareholder equity. After the buy-back or repurchase, the companies cannot trade the
shares and they are held as treasury stock or retired outright (Zhang, Donohue and Cui
2015). It is the responsibility of the companies to ensure proper recording of the
transactions of share buy-back with the aim to retain the accuracy of the financial
statements. The present study undertakes the analysis of the accounting procedure for
share buy-back and puts emphasis on the processes that the companies need to follow
in the share buy-back process.
Discussion
Share buy-back is considered as a common practice in the Australian
companies. In order to make share buy-back more easy to get to, the provision for
share buy-back were simplified in the year 1995 by the replacement of certain
compulsory processes that involve auditors, advertisements, experts and declarations

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with the new safeguards for the shareholders and creditors with the focus to continue
solvency of the company, justice for shareholders along with the effective disclosure of
the necessary relevant information (Chatterje and Mukherjee 2015). There are certain
basic types of share buy-backs; they are Equal access buy-backs, Selective buy-backs
and other types of buy-backs.
Equal access buy-back is considered as the most common as well as
straightforward form of share buy-backs in the companies. Under this process, the
companies offer all the ordinary shareholders a reasonable opportunity to take into
consideration the offer which is to buy back the same percentage of the companies’
ordinary shares. This particular scheme of share buy-back includes only insignificant
difference between the offers. Under this share buy-back scheme, the companies are
allowed to develop their own timeline with the aim to match their circumstances. It can
be seen that most of the companies in Australia opt for this particular share buy-back
scheme (Reddy Yarram 2014).
Another crucial share buy-back type of Selective buy-backs and under this
particular scheme, companies do not make identical offers to all the shareholders as the
offers are made only to some of the shareholders of the companies. However, the
shareholders must first approve the scheme or special resolution regarding the same
needs to be produced. It can be seen in many circumstances that the selling
shareholders of the companies do not vote in the favor of special resolution for the
approval of the selective buy-back. There is not any limit applicable in this buy-back
process (Jenner 2015).

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Apart from the above two, there are certain other types of share buy-back. A
company can buy back the shared held by the employees or directors of the company
and this types of buy back is considered as the Employee share scheme buy-back. This
process needs an ordinary resolution (Law 2018). After that, a listed company has the
right to buy-back its shares in on-market trading on the stock exchange with the help of
the ordinary resolution. In this process, the obligation on the company is to follow the
rules and regulation of the stock exchange. In addition, a listed company can buy back
unmarketable shares from the shareholders.
There are certain conditions that have to be satisfied by the companies at the
time of share buy-back. The buy-back of shares must be authorized by the Articles of
Association (AOA) of the companies. After that, the companies are required to pass
certain special resolutions in the general meeting for the authorization of the buy-backs.
However, as per the revised Companies Act, the Board of Directors of the companies
are now authorized to buy-back up to 10 per cent of the total paid-up capital along with
the free reserve of the companies without obtaining approval of the shareholders in the
general meetings (Ramesh and Rane 2013). The share buy-back schemes must not
surpass 25% of the total paid-up capital and free reserve of the companies. Moreover,
in a particular financial year, the buy-back of the equity shares must not surpass 25% of
the total paid-up equity capital in that particular financial year. After that, the companies
need to consider the fact that the ratio of debt possessed by the firms must not more
than twice the capital and free reserve after the share buy-back. All the shares need to
be fully paid-up under any share buy-back scheme. Moreover, the companies are
needed to comply with the regulations and rules of the respective stock exchange and

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other authorities in the buy-back of the shares. Other specific guidelines have to be
followed by the company in case the buy back shares are not listed in the stock
exchanges (Rajagopalan and Shankar 2013).
At the same time, there are certain restrictions on the share buy-back that the
companies are needed to follow. A company cannot buy back shares through any of the
subsidiary companies that include their own subsidiary company. At the same time,
share buy-back is not possible through any of the investment companies or group of the
investment companies. Lastly, a company cannot buy back shares in case a default by
the company is subsisting in the deposit repayment or interest payable. At the same
time, the companies cannot make share buy-back from the redemption of debenture of
preference shares or the payment for the dividends to the shareholders or the
repayment of any long-term loan of the payment of interest to bank or any other
financial institutions. It is required for the companies to take into consideration all of
these restriction at the time of the buy-back of the shares (Chandren Ahmad and Ali
2018).
As per the earlier discussion, share buy-back helps the companies in improving
the financial metrics of the firms as returns on both equity and assets increase. The
account for the share buy-back is a matter to understand how share buy-back will affect
each accounts and recording the correct journal entries of the same. It needs to be
mentioned that the business organizations use two methods for the share buy-back;
they are Cost methods and Constructive retirement method (Pedersen 2014). The
following discussion shows the account for buy-back under these two different methods.

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Under the use of cost methods, the first step for the companies is to ensure the
repurchase of the shares of stock that they wish to buy back. It involves the
determination of the number of shares that the company wishes to buy back for figuring
out the total that needs to be paid in cash in exchange of the shares. For example, if a
company wants to buy back 10,000 shares of stock at $15 per share, a total of $15,000
in cash needs to be paid (Đorđe and Mališa 2015).
After that, it is needed for the companies to ensure recording the transactions in
the account of treasury stock. It means the company is needed to label the debit that is
the amount needs to be paid for share buy back as ‘treasury stock’. Under that, the
same amount needs to be credited in cash. While considering the above example,
$15,000 needs to be debited as ‘treasury stock’ and the same $15,000 needs to be
credited as ‘cash’. In this context, the companies are needed to remind that treasury
stock is a contra-equity account and it cannot be traded as an asset as the company is
not authorized to legally invest in its own stock. Thus, treasury stock is included in the
balance sheet. After that, the company needs to understand the fact that it may select to
resell the stock (Kumar Pradhan and Kasilingam 2016).
The companies are needed to retire the stocks in case they do not want to resell
them. In case they want to resell the stock, they need to list the resale as cash debit for
the sale amount along with a credit for the additional paid-up capital that is the profit
from the resale of stock in the treasury stock. Thus, it is needed to list the amount of
sale minus the additional paid-up capital as a credit for the amount marked as ‘treasury
stock’. As per the above example, in case the company resells 10,000 shares at $17

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per share, $170,000 needs to be debited along with additional paid-up credit of $20,000
and $150,000 as credit (Evgeniou et al. 2018).
At the same time, the company can retire the shares. In this process, the
company is needed to notate the treasury stock at face value as a debit. As per the
same example, in case the 10,000 shares have a par value of $1, the company would
notate the shares as ‘common stock, $1 par value’ along with $10,000 debited. After
that, the company needs to list the paid amount above par value as additional paid-in
capital that is $140,000. The company needs to notate a full amount treasury stock
credit that is $150,000 for 10,000 shares (Chandren, Ahmad and Ali 2015).
Under the constructive retirement method, the companies are needed to buy
back the number of shares as per the decision of the boards. In this process, it is
needed to multiply the number of share by the price per share for determining the
amount of money needs to be paid. In case, the company bought 10,000 shares with a
par value of $1 sold for $12 each for $15 per stock, the company needs to pay
$150,000 (Zhao et al. 2014).
After that, the company needs to ensure recoding the transaction. Thus, it is
needed to list the common stock as debit for the par value, so that company needs to
list 10,000 shares with $1 par value as ‘common stock’ with $10,000 debited. The
company needs to consider the actual sales price minus the par value as additional
paid-in capital. As per the example, since the company sold 10,000 shares at $12 per
share, $110,000 would be the additional paid-in capital debited. After that, the company
needs to notate remaining $30,000 from 10,000 shares bought back at $15 per share as

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retained earnings debited. After that, the company needs to credit the whole amount of
$150,000 (Hossain and Ahmad 2015).
With the use of the constructive retirement method to share buy-back, the
companies are able to eliminate the common stock and additional paid-in capital with
the aim to write in them as a credit along with the retained earnings. The companies use
this method in the presence of the assumption that that will not be any reissue of the
stocks. It needs to be mentioned that the business organizations use either of these two
methods of share buy-back as per their requirements (Đorđe and Mališa 2015).
Conclusion
It can be seen from the above discussion that there are different types of share
buy-back options that the companies choose as per their circumstances like equal
access buy-back, selective buy-back and others. However, the companies are needed
to satisfy certain conditions for share buy-back like special resolution through AOA,
consideration of the limit of buy-back and others. At the same time, they need to
consider the necessary restriction of the share buy-back practice. It can also be
observed from the above discussion that companies can carry out their accounting
processes of share buy-back with either the use of cost method or the constructive
retirement method. However, in both of these processes, the companies are needed to
conduct the share buy-back accounting processes in the correct manner.

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Part B: Accounting for Impairment Loss
Journal Entries
Supporting Calculations

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References
Andriosopoulos, D., Andriosopoulos, K. and Hoque, H., 2013. Information disclosure,
CEO overconfidence, and share buyback completion rates. Journal of Banking &
Finance, 37(12), pp.5486-5499.
Chandren, S., Ahmad, Z. and Ali, R., 2015. Corporate governance mechanisms and
accretive share buyback to meet or beat earnings per share forecast. International
Journal of Business and Society, 16(3), p.344.
Chandren, S., Ahmad, Z. and Ali, R., 2018. Earnings management through accretive
share buyback and share price return. IJAME.
Chatterjee, C. and Mukherjee, P., 2015. Price behaviour around share buyback in the
Indian equity market. Global Business Review, 16(3), pp.425-438.
Đorđe, Đ. and Mališa, Đ., 2015. Interdependencies of markets in southeastern Europe
and buyback of shares on shallow capital markets&58; The application of cointegration
and causality tests. Panoeconomicus, 62(4), pp.469-491.
Evgeniou, T., de Fortuny, E.J., Nassuphis, N. and Vermaelen, T., 2018. Volatility and
the buyback anomaly. Journal of Corporate Finance, 49, pp.32-53.
Hossain, M.M. and Ahmad, A., 2015. Is Buying Back of Shares a Dangerous Financial
Strategy?. Global Journal of Management And Business Research.
Jenner, S., 2015. An update on capital management issues. Tax Specialist, 19(1), p.40.