When a
company buys back or reacquires its own shares, such portion of shares are
called as Treasury Shares. These are the shares that the company keeps in its
own treasury and therefore they will be deducted from equity. These shares don't pay dividends, have
no voting rights, and should not be included in shares outstanding calculations
for EPS. No gain or loss is recognized in the statement of profit and loss on
the purchase, sale, issue or cancellation of an entity’s own equity
instruments.
Case Study 1: Accounting of buy back of equity shares
IStaR Co buys back 100,000 of its own equity shares in the
market for INR 10 per share. The accounting entry for recording the purchase of
treasury shares as a deduction from equity is as follows:
Equity – Treasury Shares a/c………Dr 1000,000
To Cash/ Bank
a/c 1000,000
(Being treasury shares recognized as a deduction from equity)
Disclosures:
The amount of treasury shares held is disclosed separately
either on the face of the balance sheet or in the notes to accounts. Further, a
company provides disclosures in accordance with the requirements of Related
Party Disclosures (RPD) in cases where the company reacquires its own equity
instruments from related parties.
Indian companies have to comply with the requirements of the
Share Buy Back rules as prescribed by SEBI (Securities and Exchange Board of
India). In India, shares cannot be bought back for treasury operations.
Case Study 2: Treasury shares – Economic Hedge
IStaR is a big financial institution whose shares are listed
and included in NIFTY 50 index of NSE (National Stock Exchange). IStaR issues a
debenture whose principal amount varies with the movement in the NIFTY 50 share
index (an ‘index tracker debt’). In order to hedge economically the equity derivative
that is embedded in the debenture, IStaR purchases a portfolio of the shares
contained in the NIFTY 50 index and classifies them as held-for-trading (HFT).
IStaR cannot classify its own purchased shares as
held-for-trading (HFT) in order to hedge economically the index tracker debt.
IAS 32 – Financial Instruments – Presentation requires that treasury shares
should be shown in the balance sheet as a deduction from equity and not as
assets, and that no gain or loss should be recognized in the profit or loss on
such shares.
When an entity holds its own shares on behalf of others – when a financial institution holds its own shares on behalf of a client as a custodian – this represents an agency relationship and as a result the shares are not included in the balance sheet of the financial institution.
