Hey all, I always thought that repurchasing shares would increase equity on the balance sheet. I was doing some schweser questions and the explanations stated the opposite. Repurchasing shares would decrease equity. Am I wrong?
repurchased shares are added to an account in shareholdersâ equity called treasury stock; the treasury stock decreases equity.
If its part of shareholderâs equity how is equity decreased?
Pretty sure, share repurchase has no effect as the money used to purchase shares comes out of RE (equity) and goes into treasury shares (equity).
stupid answer: share repurchase is like retirement of debtâyou use cash to reduce your debt/equity so the current asset and liability/equity both decrease.
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I agree with cfafrank⌠A company would repurchase stock with cash which would reduce both sides of the b/s. My guess at the journal entry would be⌠----Treasury Stock (debit)________xxx --------------Cash (credit)______________xxx Iâm a little rusty so I could be completely off.
Whether you use cash or debt it doesnât really matter. If you use cash, your assets will be lower, therefore the right side of the balance sheet needs to balance. You will have lower equity, because debt stays the same. At the same time your shares have increased. Therefore book value will be lower. If you use debt, then debt will increase and equity will have to decrease in order to balance with the left side of the balance sheet (ASSETS). You will also have more shares.
Iâm gonna have to agree with you guys, cause i cracked open the book and it says: âA share repurchase should be equivalent to payment of cash dividends of equal amount in their effect on shareholdersâ wealth, all things being equal. âAll things being equalâ in this context is shorthand for assumptions that the taxation and information content of cash dividends and share repurchases do not differ.â Furthermore, if the share repurchase is made at market price, it has no impact on market value per share, repurchases above (below) market price decrease (increase) market value per share. Same general rule applies to the impact of repurchases in in that if they are priced above (below) BVPS they will decrease (increase) BVPS. Additionally, supporting ttouchst and cfafrank, I got this off of http://www.search.com/reference/Shareholdersâ_equity you can take or leave it because of the source, itâs totally up to you: âAnother event that changes the shareholdersâ equity is an equity repurchase, in which a firm gives back money to its investors, reducing on the asset side its financial assets, and on the liability side the shareholdersâ equity. For practical purposes (except for its tax consequences), share repurchasing is similar to a dividend payment, as both consist of the firm giving money back to investors. Rather than giving money to all shareholders immediately in the form of a dividend payment, a share repurchase reduces the number of shares (increases the size of each share) in future income and distributions.â
as far as i remember correctly share repurchase is also used by the company in the case where stock options are granted to employees and they are exercised. This will result in dilution of EPS and the company would engage in share repurchases to avoid this dilution. Equity will increase in this case. So my question is whether the repurchased shares that go to treasury stock are these taken into consideration when calculating shareholders equity? can u guys clarify? Thank you
nope, its not included as shareholderâs equity. Share buyback/ repurchases are a deduction on Shareholders equity.
thatâs correct. the treasury stocks are a reduction of the shareholders equity before they are used for the employee option plan. So normally the company can keep these treasury stocks only for a certain period of time. after that the company will have to either use the stocks for the employee option plan or officially âretireâ these shares. this is the accounting practice here in Taiwan though.
To clarify, shares repurchased and held as treasury stock are included in the stockholdersâ equity section on the balance sheet, as a contra account (a negative figure). Iâ canât be sure Iâm 100% right on this part, but Iâm not aware of any limitation on time to hold these in the US, or restictions on their use (I think they can also be re-issued, not just used for employee stock plans).
wonder2008 Wrote: ------------------------------------------------------- So my question is whether the > repurchased shares that go to treasury stock are > these taken into consideration when calculating > shareholders equity? > > can u guys clarify? > > Thank you Went through this yesterdayâŚâShares that have been issued and subsequently repurchased become treasury shares (treasury stock), which are not considered for dividends, voting, or computing earnings per share.â This section (pg. 149-153 CFAI Corp Fin) gives examples of the distinction between a share repurchase at market price, which gives me the impression that shareholder wealth after the repurchase is neither created or destroyed. The second example they give is if a company repurchases shares from an individual investor at a premium over market price, shareholder wealth (other than the parent) is reduced from a decreased MV or equity/share. It seems like weâre all split on whether or not shareholdersâ equity is reduced. Maybe an accounting guru like Super I or N. Van can chime in here?
Treasury Stock is a contra account like ACC. AMRTâŚworks the same way in reducing S/E Equity as ACC. AMRT reduces the asset value.
Go this website http://www.shareholder.com/sunmicro/edgar.cfm and opena nd look at Sunâs 10-Q filed on 2/06/08 for an example of presentation.