The accounting and financial reporting guidance addressing treasury stock transactions isn’t anything new.
But preparers of financial statements raise questions when addressing measurement and disclosure requirements associated with these transactions.
Questions arise about how the preparers should consider the authoritative accounting technical literature and various state laws and regulations so that financial statements are prepared properly.
The authoritative technical literature addressing accounting issues related to treasury stock transactions is in the Financial Accounting Standards Board’s Accounting Standards Codification Topic 505-30, Treasury Stock.
In complying with the accounting technical literature, the reacquisition of shares, any subsequent resale of the shares and any ultimate retirement of the shares depend on the method used in initially reflecting treasury stock transactions in financial statements. Practically, these transactions are reflected in financial statements through use of the cost method, the par value method or the constructive retirement method.
The cost method. In using the cost method of accounting for treasury stock transactions, the aggregate cost of shares reacquired is charged to a contra-equity account referred to as treasury stock. Essentially, equity accounts that initially were established upon issuance of the shares remain unchanged.
If the shares subsequently are reissued, any proceeds received that are greater than the reacquisition cost are credited to paid-in capital. Any deficiency associated with a reissuance is charged to retained earnings, unless paid-in capital from previous treasury stock transactions exists. In that case, the deficiency would be charged to paid-in capital first before being charged to retained earnings.
The cost method frequently is used in practice when reporting entities reacquire their own shares for reasons other than retiring the shares. The method also is popular in practice when reporting entity management has not made decisions as to whether the reacquired shares will be retired, held indefinitely or reissued.
The par value method. In using the par value method of accounting for treasury stock transactions, the treasury stock account is charged only for the aggregate par, or stated, value of the reacquired shares.
Then, it is important to consider amounts of additional paid-in capital available to absorb any difference between the reacquisition price and the par value of the reacquired shares. To the extent that sufficient paid-in capital is not available to absorb the difference, retained earnings would be charged for the remaining amount.
The constructive retirement method. In using the constructive retirement method of accounting for treasury stock transactions, financial statement preparers will notice similarities to using the par value method.
The obvious difference between the two methods relates to the initial recording of reacquired treasury shares because the treasury stock account is not used. Rather, as the name of the method implies, the journal entries are assembled in a manner similar to how they would be used if the shares actually were being retired upon reacquisition.
When reporting entities are incorporated in states where laws define reacquisition of shares to be retirement of the shares, the constructive retirement method actually is the only one of the three methods that would be consistent with the laws. In fact, in certain jurisdictions, reporting entities are required to use the constructive retirement method in accounting for treasury stock transactions.