Definition
When a company buys back its own shares, ASC 505-30 lets it either retire them or hold them as treasury stock. Under the common cost method, treasury stock is recorded at what was paid and presented as a reduction of equity. It is not an asset, typically carries no dividend or voting rights, and is excluded from shares outstanding. A gain or loss on reissuing the shares is not reported in net income. Proceeds above cost increase additional paid-in capital, and a shortfall reduces it and then retained earnings.
Why it matters in an audit or review
Auditors agree repurchases to board authorization, brokerage or transfer-agent records and cash payments, and test the share count used in earnings per share. The team also checks loan covenants that limit repurchases and state law limits on distributions. The cash paid is a financing outflow in the statement of cash flows.
Example
Illustrative: a company repurchases 10,000 shares at $12 for $120,000 (Dr Treasury stock, Cr Cash). It reissues 4,000 shares at $15, receiving $60,000. Treasury stock is reduced by $48,000 of cost and additional paid-in capital increases by $12,000.
Common mistakes
- Recording a gain on reissuance in income.
- Leaving treasury shares in the weighted-average share count.
Sources
- FASB ASC 505-30, Equity, Treasury Stock
- Deloitte DART, 10.4 Repurchases, Reissuances, and Retirements of Common Stock (dart.deloitte.com/USDART/home/codification/liabilities/asc480-10/roadmap-distinguishing-liabilities-from-equity/chapter-10-equity-transactions-disclosures/10-4-repurchases-reissuances-retirements-common)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error