Saturday, August 25, 2012

Accounting entries for share buy back

In today market, it is common for a listed company to buy back their own shares from the open, to the extent that it does not violate the rules of the listing authority. There is a number of reason why the management of listed companies want to buy back their own shares. It could be due to:

- the share price is deemed to be consistently lower than the intrinsic value (e.g. net tangible asset per share is greater than the share price);
- there is huge cash balances held by the holding company;
- share price is at exceptionall low level, and it is good to buy back the share from the market

What is the accounting entries for share buy-back then?

There are two possible answers for the question above, depends on management's intention:

<1> If the listed company want to buy back the share and cancel the share, the acconting entries are:

Dr. Share Capital
Cr. Cash

<2> If the listed company want to buy back the share for future re-issuance purpose (e.g. issue share option to employees):

Dr. Retained Earning- Treasury Shares
Cr. Cash

To clarify further: treausry shares account would be a debit balance. From legal perspective, it is a sub-set of Retained Earning. For financial statement disclosure purpose, it will be reflected separately from normal Retained Earning.

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Contabil said...

Interesting!:) said...

Yes there may be online two possible accounting entries.