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Forensic Accounting

How to account repurchased shares, when paid amount is higher then par value of shares?


How to account repurchased shares, when paid amount is higher then par value of shares?

asked Jan 26 in General IFRS Discussion by PCH Level 1 Member (2,340 points)

2 Answers

+1 vote
 
Best answer
When a company repurchase its own shares, there could be two treatments:

1. Cancel the shares; or

2. Transfer to treasury shares

In first case, the amount paid above par value shall go to PnL as other income.

In case share are not canceled and are held as treasury shares, the amount paid above par value shall be credited to capital redemption reserve account (part of equity)/
answered Jan 26 by Mian Musawar Level 3 Member (7,160 points)
selected Jan 28 by PCH
+1 vote

The two aspects of accounting for treasury stock are the purchase of stock by a company, and its resale of those shares.

The Cost Method

The simplest and most widely-used method for accounting for the repurchase of stock is the cost method. The accounting is:

Repurchase: To record a repurchase, simply record the entire amount of the purchase in the treasury stock account.

Resale: If the treasury stock is resold at a later date, offset the sale price against the treasury stock account, and credit any sales exceeding the repurchase cost to the additional paid-in capital account. If the sale price is less than the repurchase cost, charge the differential to any additional paid-in capital remaining from prior treasury stock transactions, and any residual amount to retained earnings if there is no remaining balance in the additional paid-in capital account.

Retirement: If management decides to permanently retire stock that it has already accounted for under the cost method, it reverses the par value and additional paid-in capital associated with the original stock sale, with any remaining amount being charged to retained earnings.

Constructive Retirement Method

An alternative method of accounting for treasury stock is the constructive retirement method, which is used under the assumption that repurchased stock will not be reissued in the future. Under this approach, you are essentially reversing the amount of the original price at which the stock was sold. The remainder of the purchase price is debited to the retained earnings account.

answered Jan 26 by zaman1980bd Level 1 Member (1,280 points)



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