10.4 Repurchases, Reissuances, and Retirements of Common Stock
10.4.1 General
ASC 505-10
General
25-2 All of the
following shall be excluded from the determination of
net income or the results of operations under all
circumstances:
- Adjustments or charges or credits resulting from transactions in the entity’s own capital stock
- Transfers to and from accounts properly designated as appropriated retained earnings (see paragraph 505-10-45-3 for what is meant by properly designated as appropriated retained earnings)
- Adjustments made pursuant to a quasi-reorganization (see Subtopic 852-20 for information concerning quasi-reorganizations).
ASC 505-30
General
05-1 This Subtopic
addresses the accounting and reporting for an entity’s
repurchase of its own outstanding common stock as well
as the subsequent constructive or actual retirement of
those shares.
05-2 Entities may
repurchase their own outstanding common stock for a
variety of different purposes. Repurchased common stock
is often referred to as treasury stock or treasury
shares.
05-3 When entities
repurchase their own common stock, laws applicable to
those entities may affect the treatment and accounting
for repurchased shares of stock. Entities sometimes pay
more or less for the repurchased shares than either
their fair value or their original issue price.
Entities
15-1 The guidance
in this Subtopic applies to all entities, unless more
specific guidance is provided in other Topics.
Transactions
15-2 The guidance
in this Subtopic applies to all transactions involving
the repurchase of an entity’s own outstanding common
stock as well as the subsequent constructive or actual
retirement of those shares, unless more specific
guidance for those transactions is provided in other
Topics.
General
25-1 This Section
addresses the accounting requirements for the
differences in amounts that result in either of the
following situations:
- An entity repurchases its own outstanding common stock for an amount that differs from the price obtainable in open market transactions.
- An entity subsequently resells previously repurchased common stock for an amount that differs from the repurchase amount paid.
This Section also identifies a program to acquire
treasury shares, often described as an accelerated share
repurchase program, as two separate transactions.
General
30-1 This Section
provides guidance on measuring amounts that arise from
repurchases of an entity’s own outstanding common stock.
The measurement issues addressed include both of the
following:
- Determining the allocation of amounts paid to the repurchased shares and other elements of the repurchase transaction
- Further allocation of amounts allocated to repurchased shares to various components of stockholder equity upon formal or constructive retirement.
ASC 505-30 addresses the accounting for repurchases, retirements, and reissuances
of common stock. It does not apply to repurchases of preferred stock (see
Section 10.5). Unless the transaction includes other
elements that must be recognized separately (see Section
10.4.2), repurchases, reissuances, and retirements of common
stock do not affect an entity’s net income or comprehensive income. Rather, any
difference between the carrying amount and the consideration paid or received is
recorded in equity. Common shares that are repurchased may not be presented as
assets in the financial statements.
This section discusses repurchases, retirements, and reissuances of common stock,
but it does not specifically address all of the relevant financial reporting
considerations related to any of the following:
-
Contracts to repurchase common stock — Freestanding contracts to repurchase common shares should be classified in accordance with ASC 480 and ASC 815-40. The settlement of such contracts should also be accounted for in accordance with ASC 480 and ASC 815-40. Embedded repurchase features should be evaluated for bifurcation in accordance with ASC 815-15, and SEC registrants should consider the SEC’s guidance on temporary equity (see Chapter 9). Note that the concepts discussed below regarding the capital accounts used to record the repurchase of common shares are generally applicable.
-
Accelerated share repurchases — For discussions of the accounting for such repurchases, see Section 3.3.5 as well as Section 3.2.5 of Deloitte’s Roadmap Contracts on an Entity’s Own Equity.
-
Earnings per share — For EPS considerations, see Section 3.2.4.3 of Deloitte’s Roadmap Earnings per Share.
In addition, this section addresses the accounting considerations related to
stock buyback taxes incurred in conjunction with the repurchase of any capital
stock, including preferred stock and share-based payment arrangements.
See Section 10.10.3.3 for a discussion of the disclosures
required related to repurchases of common stock.
10.4.2 Allocation of Repurchase Price
ASC 505-30
Requirement to Allocate Repurchase Amount
25-3 The facts and
circumstances associated with a share repurchase may
suggest that the total payment relates to other than the
shares repurchased. An entity offering to repurchase
shares only from a specific shareholder (or group of
shareholders) suggests that the repurchase may involve
more than the purchase of treasury shares. Also, if an
entity repurchases shares at a price that is different
from the price obtainable in transactions in the open
market or transactions in which the identity of the
selling shareholder is not important, some portion of
the amount being paid presumably represents a payment
for stated or unstated rights or privileges that shall
be given separate accounting recognition. See paragraph
505-30-30-3 for the measurement requirements associated
with the different elements identified within such a
transaction.
25-4 Payments by an
entity to a shareholder or former shareholder
attributed, for example, to a standstill agreement, or
any agreement in which a shareholder or former
shareholder agrees not to purchase additional shares,
shall be expensed as incurred. Such payments do not give
rise to assets of the entity.
Allocating Repurchase Price to Other Elements of the
Repurchase Transaction
30-2 An allocation
of repurchase price to other elements of the repurchase
transaction may be required if an entity purchases
treasury shares at a stated price significantly in
excess of the current market price of the shares. An
agreement to repurchase shares from a shareholder may
also involve the receipt or payment of consideration in
exchange for stated or unstated rights or privileges
that shall be identified to properly allocate the
repurchase price.
30-3 For example,
the selling shareholder may agree to abandon certain
acquisition plans, forego other planned transactions,
settle litigation, settle employment contracts, or
restrict voluntarily the ability to purchase shares of
the entity or its affiliates within a stated time
period. If the purchase of treasury shares includes the
receipt of stated or unstated rights, privileges, or
agreements in addition to the capital stock, only the
amount representing the fair value of the treasury
shares at the date the major terms of the agreement to
purchase the shares are reached shall be accounted for
as the cost of the shares acquired. The price paid in
excess of the amount accounted for as the cost of
treasury shares shall be attributed to the other
elements of the transaction and accounted for according
to their substance. If the fair value of those other
elements of the transaction is more clearly evident, for
example, because an entity’s shares are not publicly
traded, that amount shall be assigned to those elements
and the difference recorded as the cost of treasury
shares. If no stated or unstated consideration in
addition to the capital stock can be identified, the
entire purchase price shall be accounted for as the cost
of treasury shares.
30-4 Transactions
do arise, however, in which a reacquisition of an
entity’s stock may take place at prices different from
routine transactions in the open market. For example, to
obtain the desired number of shares in a tender offer to
all or most shareholders, the offer may need to be at a
price in excess of the current market price. In
addition, a block of shares representing a controlling
interest will generally trade at a price in excess of
market, and a large block of shares may trade at a price
above or below the current market price depending on
whether the buyer or seller initiates the transaction.
An entity’s reacquisition of its shares in those
circumstances is solely a treasury stock transaction
properly accounted for at the purchase price of the
treasury shares. Therefore, in the absence of the
receipt of stated or unstated consideration in addition
to the capital stock, the entire purchase price shall be
accounted for as the cost of treasury shares.
Allocating the Cost of Treasury Shares to Components
of Shareholder Equity Upon Formal or Constructive
Retirement
30-5 An entity that
repurchases its own outstanding common stock may be
required under paragraph 505-30-30-3 to allocate a
portion of the repurchase price to other elements of the
transaction.
Nonauthoritative AICPA Guidance
Technical Q&As Section 4120, “Reacquisition of
Capital Stock”
.05 Purchase of Treasury Shares for an Amount in
Excess of Market Price
Inquiry — A corporation enters into an agreement
to purchase a major block of its shares from one of its
shareholders at a price in excess of its current market
price. These shares represent the controlling interest
in the corporation. The purchase price of the treasury
stock does not include any other rights or privileges.
At what value should the corporation record the treasury
stock?
Reply — Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC)
505-30-30-4 states that transactions do arise in which
an acquisition of an enterprise's stock may take place
at prices different from routine transactions in the
open market. A block of shares representing a
controlling interest will generally trade at a price in
excess of market, and a large block of shares may trade
at a price above or below the current market price
depending on whether the buyer or seller initiates the
transaction. A company's acquisition of its shares in
those circumstances is solely a treasury stock
transaction and is properly accounted for at the
purchase price of the treasury shares.
In this situation, since the purchase price does not
include amounts attributable to items other than the
shares purchased, the entire purchase price should be
accounted for as the cost of treasury shares.
ASC 505-30 addresses the accounting for repurchases of common stock. While the
SEC’s guidance in ASC 260-10-S99-2 (see Section 10.3.4.3.7)
does not apply to a reacquisition of common stock, its temporary equity guidance
in ASC 480-10-S99-3A applies to redeemable common stock. Therefore, the
accounting guidance in ASC 505-30 would typically apply to redeemable common
stock only if the reacquisition occurs outside the terms of the embedded
redemption feature in the common stock. In the discussion below, it is assumed
that the reacquisition of common stock occurs in accordance with an arrangement
other than an embedded redemption option in common stock (e.g., it is assumed
that the SEC’s guidance on redemptions of redeemable common stock does not
apply).
When the price paid to reacquire shares of common stock is fair value, the
repurchase is treated solely as a treasury stock transaction and there is no
impact on earnings or the numerator in the calculation of EPS. However, ASC
505-30 indicates that, in some circumstances, the price paid to repurchase
common shares includes other elements, whether stated or unstated, for which
separate accounting is required and provides guidance on allocating the
repurchase price to these other elements. In accordance with ASC 505-30, when an
entity pays an amount in excess of fair value to repurchase its common shares
and the excess is attributable to the receipt of stated or unstated rights,
privileges, or agreements in addition to the treasury stock transaction, those
other elements must be accounted for separately from the treasury stock
transaction element. The accounting for the other elements is subject to the
requirements of other GAAP. However, in some circumstances, an entity may
conclude that other GAAP requirements do not address the accounting for the
excess of the repurchase price over fair value and that this excess therefore
represents an expense or a dividend to a common shareholder. In reaching such a
conclusion, an entity must use judgment and evaluate the specific facts and
circumstances associated with the repurchase transaction. If an entity concludes
that a payment in excess of fair value is more characteristic of a dividend than
an earnings charge (i.e., because the excess represents a pro rata
distribution), that dividend should be recognized as part of the repurchase. (As
discussed in Section 3.2.4.3 of Deloitte’s Roadmap
Earnings per Share, that dividend will
reduce net income in arriving at income available to common stockholders and, in
some cases, could result in the need to apply the two-class method of
calculating basic EPS.)
ASC 505-30 discusses two important concepts that an entity must consider when
paying an amount in excess of the current market price to repurchase shares of
common stock:
-
Excess of repurchase price per share over the current market price is “insignificant” — Under ASC 505-30-30-2, an “allocation of [the] repurchase price to other elements of the repurchase transaction may be required if an entity purchases treasury shares at a stated price significantly in excess of the current market price of the shares.” This means that if an entity has determined that there are no other stated or unstated rights or privileges associated with the share repurchase for which separate accounting is required under other GAAP, and the excess of the repurchase price per share over the current market price per share is not significant, no separate accounting for the excess is required (i.e., the excess is part of the price paid in the treasury stock transaction and does not represent a dividend or expense item). However, even if the repurchase price exceeds the current market price of the common shares by an insignificant amount, an entity must still analyze the repurchase transaction to determine whether there are other elements of the repurchase transaction that should be recognized separately under other GAAP. The treasury stock transaction should not include consideration paid to the selling shareholder that must be accounted for under other GAAP. For this purpose, “significant” is generally interpreted in practice as 10 percent or more.
-
Excess of repurchase price per share over the current market price is “significant” — ASC 505-30-30-4 acknowledges that the excess of the amount paid to repurchase common shares over the current market price may constitute part of the treasury stock transaction even if the repurchase price is significantly “in excess of the current market price” of the shares. ASC 505-30 focuses on a comparison of the repurchase price per share with the current market price per share; however, this is only the starting point in the analysis. Even if the repurchase price per share exceeds the current market price per share, there are generally no other stated or unstated rights to separately account for if the consideration paid does not exceed the fair value of the shares repurchased. An entity should consider the fair value measurement principles in ASC 820, particularly ASC 820-10-30-2 through 30-3A, in determining whether the repurchase price (i.e., the transaction price) exceeds the fair value of the shares repurchased. A repurchase price per share in excess of the current market price per share may represent an arm’s-length transaction price to just repurchase shares if the consideration paid exceeds the number of shares repurchased times the quoted market price (“P × Q”) because the shares are thinly traded or the repurchase involves a number of shares that exceed the number the market can readily absorb on a single trading day without significantly affecting the price per share. However, since it is presumed that a significant excess of the amount paid over the current market price represents an element other than a treasury stock transaction, an entity will need sufficient evidence to demonstrate that the repurchase price does not exceed the fair value of the shares repurchased. An entity should consider, among other matters, (1) the relationship it has with the selling shareholder (i.e., whether there is a related-party relationship or another transaction between the entity and the shareholder), (2) the facts and circumstances related to the share repurchase itself, and (3) what it believes to be the fair value of the shares repurchased (i.e., a market price to repurchase the number of shares repurchased). To conclude that the repurchase price represents an arm’s-length transaction when it does not represent P × Q, an entity must be able to determine that the same repurchase price would have been paid to any holder of the shares.11 If an entity cannot conclude that the consideration paid does not exceed the fair value of the shares repurchased, the excess must be associated with something other than the treasury stock transaction. If no other element is identified for which accounting is required under other GAAP, the excess should be treated as a dividend paid to the selling shareholder or as an expense. An entity must use judgment in making this determination and consider the facts and circumstances associated with the excess payment and the relationship between the entity and selling shareholder. When in doubt regarding the treatment of this excess amount, it is generally appropriate for an entity to account for it as an expense.
If a repurchase of common stock occurs between an entity and an employee, or with
a nonemployee that provided goods and services to the entity, the guidance in
ASC 718 should be considered. (For additional discussion, see Deloitte’s Roadmap
Share-Based Payment Awards.)
ASC 505-30-50-4 requires disclosure of (1) the allocation of amounts paid to the
treasury shares and other elements of the transaction and (2) the accounting
treatment for such amounts (see Section 10.10.3.3).
Example 10-11
Treasury Stock Purchase in Excess of Quoted Market
Price
Entity L, an entity with publicly traded stock, enters
into a transaction to immediately buy its own common
shares at $8.75 per share, which is 25 percent above the
current quoted market price of $7 per share. The shares
to be purchased are currently held by a single
corporation and represent 17 percent of L’s outstanding
common shares. Entity L states three reasons for
purchasing the shares at an above-market price:
- Although the price is above the quoted market price, it is still an attractive price.
- In one transaction, L can effectively decrease dilution.
- Bidding for that volume of shares in the market, with such small volumes of trade (average daily trade volume is less than 1 percent of L’s total outstanding common shares), will significantly increase the market price even above the contract price.
Provided that the transaction does not involve the
receipt or payment of consideration in exchange for any
stated or unstated rights, privileges, or agreements in
addition to the shares of common stock repurchased, the
entire purchase price should be accounted for as the
cost of treasury shares. ASC 505-30-50-3 states the
following regarding how a company should account for
treasury shares purchased at a stated price
significantly in excess of the current market price of
the shares:
A repurchase of shares at a price
significantly in excess of the current market price
creates a presumption that the repurchase price
includes amounts attributable to items other than
the shares repurchased. A repurchase of shares at a
price significantly in excess of the current market
price may require an entity to allocate amounts to
other elements of the transaction under the
requirements of paragraph 505-30-30-2.
If the price paid in excess of the current market price
of the shares represented payment for consideration
received in the transaction other than the shares, the
excess should be attributed to the costs of the other
element and accounted for according to the substance of
that element.
The purchase of the shares at a price in
excess of the current market price creates a presumption
that the excess price is attributable to items other
than the shares. For the entire purchase price to be
accounted for as the costs of the treasury shares, this
presumption needs to be overcome by sufficient evidence
to the contrary. If the presumption cannot be overcome,
the excess price should be attributed to the other items
and accounted for according to the substance of those
items. Evidence may include, but is not limited to, a
valuation from an investment banker supporting the price
paid by the company and an analysis of the trading
volume indicating that the company could not purchase
this volume of shares in a reasonable amount of time
without significantly affecting the current market
price. For example, L may be able to obtain sufficient
evidence to conclude that the price paid is not
influenced by the issuer-holder relationship and that
the price would be the same if L had acquired that
number of shares from another holder (or group of
holders).
If there is sufficient evidence to overcome the
presumption that the price paid in excess of the current
market price of the shares represents payment for
consideration received in the transaction other than the
shares, L should account for the purchase of the shares
in accordance with ASC 505-30-30-4, which indicates that
transactions to repurchase shares of common stock in
excess of the current market price may occur even if the
excess is not attributable to something other than a
treasury stock transaction (i.e., the repurchase price
was representative of the fair value of the shares of
common stock repurchased). In other words, if the
presumption is overcome, the entire purchase price
should be accounted for as the cost of the treasury
shares. Such accounting would generally be appropriate
only if an entity concludes that the repurchase price
represents a price paid in an arm’s-length transaction
for the number of shares repurchased (i.e., a fair value
price for the shares repurchased).
Example 10-12
Repurchase of Common Stock From an Employee and a
Customer
Entity M enters into two separate agreements to
repurchase a total of 200,000 shares of its publicly
traded common stock. The first agreement is with
Employee T and requires M to immediately buy 100,000
shares of M’s common stock at $15 per share. The second
agreement is with Customer D and also requires M to
immediately buy 100,000 shares of M’s common stock at
$15 per share. Both agreements are entered into on the
same day. On that day, the market price of M’s common
stock is $10.
In the first agreement, M repurchased 100,000 of its own
shares from T. Because T is an employee, there are
elements to the transaction other than the simple
purchase of treasury stock. Accordingly, M must
recognize the fair value of the excess amount paid to
repurchase the shares, which is calculated as ([$15 –
$10] × 100,000 shares) or $500,000. Since this amount is
related to a transaction with an employee, it should be
recognized as compensation expense and not as part of
the cost of acquiring the treasury stock, which would be
based on the market price of the stock of $10 per
share.
In the second agreement, M purchased its shares from a
customer, D. Because there is an inherent revenue
relationship between M (a vendor) and D (a customer),
there are elements to the transaction other than the
simple purchase of treasury stock. Those elements should
be accounted for in accordance with ASC 606.
In summary, for the acquisition of the 200,000 shares of
treasury stock, M recognized $2 million (based on a
market price of $10 per share) related to the cost of
the treasury stock, $500,000 as compensation expense,
and $500,000 as consideration paid to a customer (i.e.,
a contra-revenue charge).
The guidance discussed above also applies to the redemption of a noncontrolling
interest in the form of common stock (see also Section 7.1.2.2 of Deloitte’s Roadmap Noncontrolling Interests). For additional discussion
of the effect on EPS of repurchasing common shares, see Section 3.2.4.3 of Deloitte’s Roadmap Earnings per Share.
10.4.3 Costs Incurred to Reacquire Common Stock
10.4.3.1 General
Nonauthoritative AICPA Guidance
Technical Q&As Section 4110, “Issuance of
Capital Stock”
.09 Costs Incurred to Acquire Treasury
Stock
Inquiry — A company has incurred legal and
accounting costs arising from the acquisition of
treasury stock. How should the costs be classified
in the company's financial statements?
Reply — There is no authoritative literature
on this particular subject. Some accountants believe
that costs associated with the acquisition of
treasury stock should be treated in a manner similar
to stock issue costs. Stock issue costs are usually
accounted for as a deduction from the gross proceeds
of the sale of stock. Costs associated with the
acquisition of treasury stock may be added to the
cost of the treasury stock.
Specific incremental costs and fees paid to third parties and directly
attributable to the repurchase of outstanding common shares are accounted
for as part of the repurchase price and recognized in equity. If the shares
repurchased are presented as treasury stock (see Section
10.4.4.1), the acquisition costs are added to the cost of the
treasury stock. If the shares repurchased are legally or constructively
retired (see Section 10.4.4.2), the equity acquisition
costs are accounted for in a manner similar to the retired shares.
Qualifying equity acquisition costs are limited to specific incremental costs
and fees that are paid to third parties and that are directly attributable
to the acquisition. Such costs result directly from and are essential to the
reacquisition of shares and would not have been incurred by the issuer had
the shares not been reacquired. Costs and fees that would have been incurred
regardless of whether shares are reacquired do not qualify as acquisition
costs (e.g., allocated management salaries and other general and
administrative expenses). Further, costs and fees qualify as equity
acquisition costs only if they were incurred by the time the shares were
acquired. Costs incurred after the reacquisition of shares do not qualify as
equity acquisition costs unless they were obligations as of the issue date.
The table below provides examples of costs and fees that may qualify as
direct and incremental costs incurred to reacquire common shares.
Table 10-6
|
Acquisition Costs if Directly Attributable to
Reacquisition
|
Costs That May Not Be Considered Acquisition
Costs
|
|---|---|
|
|
10.4.3.2 Stock Buyback Tax Under the Inflation Reduction Act of 2022
The Inflation Reduction Act of 2022 added Section 4501,
“Repurchase of Corporate Stock,” to the Internal Revenue Code. IRC Section
4501 imposes a 1 percent excise tax on stock repurchases by publicly traded
companies that occur after December 31, 2022. Specifically, under IRC
Section 4501, a covered corporation is subject to a tax equal to 1 percent
of (1) the fair market value of any stock of the corporation that is
repurchased by the corporation (or certain affiliates) during any taxable
year, with limited exceptions, less (2) the fair market value of any stock
issued by the covered corporation (or certain affiliates) during the taxable
year (including compensatory stock issuances). The 1 percent excise tax may
also be imposed on acquisitions of stock in certain mergers or acquisitions
involving covered corporations.
Because the tax is not based on a measure of income, it is
not an income tax; instead, it is an excise tax and therefore not within the
scope of ASC 740. The accounting for taxes paid in connection with the
repurchase of stock is not specifically addressed in U.S. GAAP. However,
AICPA Technical Q&As Section 4110.09 indicates that direct and
incremental legal and accounting “[c]osts associated with the acquisition of
treasury stock may be added to the cost of the treasury stock.” Therefore,
it is acceptable to account for the IRC Section 4501 excise tax obligation
that results from the repurchase of common stock classified within permanent
equity as a cost of the treasury stock transaction. Any reductions in the
excise tax obligation associated with share issuances would also be
recognized as part of the original treasury stock transaction even if the
share issuance is a different type of instrument than the share that was
repurchased.
Additional considerations are necessary when the excise tax obligation is
related to redemptions of preferred stock. Such an excise tax obligation
would be recognized as a cost of redeeming the preferred stock (see
Section 10.3.4.3.7). The accounting for redemptions
of preferred stock differs depending on the classification of the preferred
stock as permanent equity, temporary equity, or a liability. An entity would
need to use a systematic and rational allocation approach to account for the
effect of share issuances on the excise tax obligation when the entity has
repurchases of both common stock and preferred stock during a taxable
period.
The sections below address certain financial reporting and
disclosure issues (but not legal interpretations) related to the IRC Section
4501 excise tax. Entities should consult with their legal advisers regarding
any interpretations of the excise tax that could affect their financial
reporting. It is assumed in the discussions that any common stock subject to
the excise tax is classified in permanent equity.
10.4.3.2.1 Measuring the Excise Tax Obligation in an Interim Reporting Period
Because the excise tax is imposed annually, the calculation of the amount
owed for a taxable year is only determined at the end of the annual
period for which the tax is payable. For interim periods, an entity is
not required to estimate future stock repurchases and issuances when
measuring its excise tax obligation; rather, the entity can generally
record the obligation on an as-incurred basis.12 In other words, the excise tax obligation recognized at the end of
a quarterly financial reporting period is calculated as if the end of
the quarterly period was the end of the annual period for which the
excise tax obligation is payable. Although the excise tax is not within
the scope of ASC 740, this approach is similar to an entity’s accounting
for items separately from its determination of the estimated annual
effective tax rate (i.e., discrete items).
Example 10-13
Recognition of Stock Buyback Tax in an Interim
Period
Entity N, a calendar-year entity, repurchases
common stock with a fair value of $100 million on
February 1, 20X2. Entity N also expects to issue
$40 million of common stock during the remaining
fiscal year but has not issued any such stock as
of March 31, 20X2. For the interim period ended
March 31, 20X2, N would record the following
journal entry for the excise tax:
Although N intends to have net repurchases of $60
million in stock during the fiscal year and
therefore expects to be obligated to pay an excise
tax of $600,000 for the year ended December 31,
20X2, for the three months ended March 31, 20X2, N
has only repurchased common stock that has a fair
value of $100 million. Therefore, as of March 31,
20X2, N recognizes the $1 million tax that would
be payable if N only repurchased $100 million of
common stock (i.e., $100 million × 0.01 = $1
million).
Note that although an entity is not required to
recognize an excise tax obligation in interim
periods by using an approach based on the
estimated annual excise tax payable, such
recognition is not precluded provided that the
amount of tax obligation recorded as of any
balance sheet date does not exceed the amount that
would be payable if the balance sheet date was the
end of the taxable year. Such an alternative
approach may be consistent with the estimated
annual effective tax rate method that is used to
calculate income taxes on an interim basis under
ASC 740. However, because of the complexities of
this approach, it is not expected to be widely
used in practice. Given the facts above, for the
interim period ended March 31, 20X2, N would
record the following journal entry for the excise
tax if it used this alternative approach:
The approach an entity uses to recognize an
excise tax obligation during an interim reporting
period is an accounting policy election that must
be consistently applied and, if material,
disclosed.
10.4.3.2.2 Excise Tax Obligations Arising From Repurchases of Preferred Stock
The accounting for excise taxes associated with the repurchase of
preferred stock will depend on how such stock is classified:
-
Preferred stock classified in permanent equity — The excise tax obligation should be included in the charge (or credit) to retained earnings that is recognized for the redemption of the preferred stock in accordance with ASC 260-10-S99-2. This charge (or credit) is accounted for as a dividend (or deemed contribution) that adjusts the numerator in the calculation of basic EPS. The obligation for the excise tax should be recognized on the repurchase date. For more information about the redemption of preferred stock see Section 10.3.4.3.7 as well as Section 3.2.2.6 of Deloitte’s Roadmap Earnings per Share.
-
Preferred stock classified in temporary equity — If the preferred stock is being remeasured to its redemption amount under ASC 480-10-S99-3A, the entity should consider the probability of redeeming the instrument. This assessment differs from the requirement in ASC 480-10-S99-3A to assess whether it is probable that the preferred stock instrument will become redeemable. If it is probable that the preferred stock instrument will be redeemed, it is appropriate to include the future excise tax obligation in the periodic remeasurement of the instrument to its redemption amount. Any adjustment to the excise tax obligation on actual redemption of the preferred stock would be recognized as a charge (or credit) to retained earnings in accordance with ASC 480-10-S99-3A and ASC 260-10-S99-2.If the preferred stock is not being remeasured to its redemption amount under ASC 480-10-S99-3A or it is not probable that the instrument will be redeemed, the entity should account for the excise tax in the same manner as it would account for an excise tax on the redemption of preferred stock that is not classified in temporary equity.See Chapter 9 for more information about applying the SEC’s guidance on temporary equity.
-
Preferred stock classified as a liability — Preferred stock that is a mandatorily redeemable financial instrument under ASC 480-10-25-4 (see Chapter 4) must be classified as a liability. Because it is certain on issuance of such an instrument that it will be redeemed, if the redemption of the instrument gives rise to an excise tax obligation, that obligation may be considered to have been incurred on the issuance date. However, if the redemption was to occur during an annual period in which there are stock issuances, the entity could owe no excise tax as a result of the redemption of the liability-classified preferred stock instrument. Furthermore, the amount of any tax owed could change on the basis of the change in the fair value of the liability-classified preferred stock instrument. For these reasons, there may be diversity in the accounting for an excise tax obligation associated with the repurchase of liability-classified preferred stock. Approaches that may be applied in practice to account for an excise tax obligation associated with the redemption of liability-classified preferred stock include:
-
View A — Recognize the excise tax obligation on the date the instrument is issued, with an offsetting discount on the preferred stock. This discount would be amortized to interest cost over the life of the instrument in accordance with the interest method in ASC 835-30.
-
View B — Recognize the excise tax obligation over the life of the instrument in accordance with the interest method in ASC 835-30. This approach differs from View A only with respect to the timing of when the obligation is recognized.
-
View C — Recognize the excise tax obligation on the date the instrument is redeemed. The excise tax would be included in the gain or loss on extinguishment of the instrument. The excise tax amount may be affected by stock issuances during the period the instrument is redeemed.
Because the accounting for an excise tax obligation that is incurred upon the redemption of a liability-classified preferred stock instrument is not specifically addressed in U.S. GAAP, any of the above three approaches may be acceptable depending on the facts and circumstances. -
10.4.3.2.3 Excise Tax Obligations Arising From the Repurchase of Share-Based Payments
If the share-based payment award was classified as an equity instrument
before the repurchase and no additional compensation cost is recognized
from the repurchase, the excise tax would be recognized in equity as
part of the repurchase transaction. If, however, additional compensation
cost is recognized as a result of the repurchase, a portion of the
excise tax, if any, that is allocable to the additional compensation
cost should be recognized in earnings. If the share-based payment award
was classified as a liability instrument, the excise tax should be
recognized in earnings as part of the extinguishment of the
liability.
10.4.3.2.4 Allocating Offsetting Credits for Stock Issuances
An entity should record a reduction in the excise tax
obligation that results from a stock issuance transaction as a decrease
to the “debit” entry that was recognized from the original repurchase
transaction that gave rise to the excise tax obligation. It is not
acceptable to record the reduction in the tax obligation on the basis of
the nature of the stock issuance transaction that gives rise to the
credit to the overall tax obligation. Such an approach could result in
net credits to income as a result of the excise tax, which is not
appropriate.
Note that the accounting for reductions in an excise tax obligation that
arise from stock issuances could be complex. This is especially the case
if an entity has multiple repurchases and issuances during an annual
period. Therefore, an entity is required to use a systematic and
rational allocation approach to account for the effect of share
issuances on the excise tax obligation when the entity has repurchases
of common stock, preferred stock (whether classified in permanent
equity, temporary equity, or as a liability), and share-based payment
awards during a taxable period.
Example 10-14
Offsetting Credits for Stock Issuances
Entity O repurchases $1 billion in common stock,
which results in an excise tax obligation of $10
million. This excise tax is recorded in equity as
follows:
Later in the same taxable year, O grants fully
vested common stock to employees that has a fair
value of $100 million, resulting in a $1 million
reduction in the excise tax amount due. The
compensation cost for these shares is expensed as
incurred.
Entity O would record the following journal entry
to account for the impact of the stock issuance on
the excise tax amount due:
If O had associated the excise tax reduction from
the stock issuance with the transaction that gave
rise to this decrease, it would have recognized a
$1 million credit to compensation expense. Such
recognition would not be acceptable. Rather, the
net excise tax amount due of $9 million should be
recognized as a debit to treasury stock or the
applicable common equity accounts.
Example 10-15
Allocation of Credits From Stock Issuances to
Various Repurchase Transactions
Entity P has the following
transactions that are subject to the IRC Section
4501 excise tax:
- Repurchase of $2 billion of common stock.
- Repurchase of $1 billion of equity-classified preferred stock.
- Issuance of $500 million of common stock as part of a share-based payment arrangement.
Entity P has determined that a pro rata
allocation of the reduction in the total excise
tax arising from the issuance of common stock
would represent a systematic and rational
accounting method. Therefore, P allocates the $5
million benefit (i.e., $500 million × 0.01 = $5
million) from the issuance of common stock as
follows:
Note that if P originally
reported a reduction to retained earnings of $10
million ($1 billion × 0.01 = $10 million) as a
result of the repurchase of the preferred stock,
it would later record a credit to retained
earnings of $1.66 million in such a way that a net
amount of $8.33 million would be reflected as a
reduction to income available to common
stockholders in the annual calculation of basic
EPS.
10.4.4 Accounting for Treasury Stock Transactions
10.4.4.1 Shares Are Held in Treasury
Entities that reacquire their own common stock often hold those shares in
treasury. ASC 505-30 addresses the recognition, measurement, and
presentation of shares when they are held in treasury as well as the
accounting if those shares are resold.
10.4.4.1.1 Recognition of Common Shares Held as Treasury Stock
ASC 505-30
Allocating the Cost of Treasury Shares to
Components of Shareholder Equity Upon Formal or
Constructive Retirement
30-6 Once
the cost of the treasury shares is determined
under the requirements of this Section, and if a
corporation’s stock is acquired for purposes other
than retirement (formal or constructive), or if
ultimate disposition has not yet been decided,
paragraph 505-30-45-1 permits the cost of acquired
stock to either be shown separately as a deduction
from the total of capital stock, additional
paid-in capital, and retained earnings, or be
accorded the following accounting treatment
appropriate for retired stock.
General
45-1 If a
corporation’s stock is acquired for purposes other
than retirement (formal or constructive), or if
ultimate disposition has not yet been decided, the
cost of acquired stock may be shown separately as
a deduction from the total of capital stock,
additional paid-in capital, and retained earnings,
or may be accorded the accounting treatment
appropriate for retired stock specified in
paragraphs 505-30-30-7 through 30-10.
An entity should select and consistently apply an accounting policy for
repurchases of shares of common stock that are not legally or
constructively retired. One permissible accounting policy is to record
the cost of repurchasing such stock separately as a deduction from
equity (debit treasury stock, credit cash). Alternatively, an entity may
select the same accounting policy as that for stock that it has legally
or constructively retired (see Section 10.4.4.2).
Regardless of the presentation, dividends on shares held in treasury may
not be recognized in income.
10.4.4.1.2 Recognition of Resales of Treasury Shares
ASC 505-30
Subsequent Resale of Shares
Repurchased
25-7 After
an entity’s repurchase of its own outstanding
common stock, sometimes it may either retire the
repurchased shares and issue additional common
shares, or, as an alternative, resell the
repurchased shares. In either case, the price
received may differ from the amount paid to
repurchase the shares. While the net asset value
of the shares of common stock outstanding in the
hands of the public may be increased or decreased
by such repurchase and retirement, such
transactions relate to the capital of the
corporation and do not give rise to corporate
profits or losses. There is no essential
difference between the following:
- The repurchase and retirement of a corporation’s own common stock and the subsequent issue of common shares
- The repurchase and resale of its own common stock.
25-8 Even
though there may be cases where the transactions
involved are so inconsequential as to be
immaterial, as a broad general principle, such
transactions shall not be reflected in retained
earnings (either directly or through inclusion in
the income statement). The qualification shall not
be applied to any transaction that, although in
itself inconsiderable in amount, is a part of a
series of transactions that in the aggregate are
of substantial importance.
25-9 The
difference between the repurchase and resale
prices of a corporation’s own common stock shall
be reflected as part of the capital of a
corporation and allocated to the different
components within stockholder equity as required
by paragraphs 505-30-30-5 through 30-10.
Allocating the Cost of Treasury Shares to
Components of Shareholder Equity Upon Formal or
Constructive Retirement
30-10 Gains
on sales of treasury stock not previously
accounted for as constructively retired shall be
credited to additional paid-in capital; losses may
be charged to additional paid-in capital to the
extent that previous net gains from sales or
retirements of the same class of stock are
included therein, otherwise to retained
earnings.
The resale of treasury shares at fair value should not
affect an entity’s net income or comprehensive income. Instead, any
difference between the resale price and the cost of the treasury stock
sold is recorded directly against equity. If the resale price received
exceeds the cost, this excess amount is credited to APIC. If the cost
exceeds the resale price, the difference may be charged to APIC to the
extent of previous gains from sales or retirement of the same class of
stock; any remaining amount is recognized in retained earnings.
Alternatively, an entity may charge the entire loss to either APIC or
retained earnings in a manner similar to its accounting for legal or
constructive retirements of equity shares (see Section
10.4.4.2). In determining the cost of individual treasury
shares sold, an entity should apply a consistent accounting policy
(e.g., specific identification; weighted-average cost; or first-in,
first-out).
10.4.4.2 Shares Are Retired
ASC 505-30
Subsequent Resale of Shares Repurchased
25-7 After an
entity’s repurchase of its own outstanding common
stock, sometimes it may either retire the
repurchased shares and issue additional common
shares, or, as an alternative, resell the
repurchased shares. In either case, the price
received may differ from the amount paid to
repurchase the shares. While the net asset value of
the shares of common stock outstanding in the hands
of the public may be increased or decreased by such
repurchase and retirement, such transactions relate
to the capital of the corporation and do not give
rise to corporate profits or losses. There is no
essential difference between the following:
- The repurchase and retirement of a corporation’s own common stock and the subsequent issue of common shares
- The repurchase and resale of its own common stock.
The constructive or legal retirement of reacquired common
shares should not affect an entity’s net income or comprehensive income. The
accounting for the legal or constructive retirement of shares of common
stock depends on whether the repurchase price exceeds the par or stated
value. Shares are deemed to be constructively retired if the entity has made
a decision not to reissue the repurchased shares. The sections below discuss
considerations related to the accounting for retired common shares.
10.4.4.2.1 Repurchase Price Exceeds the Par or Stated Value
ASC 505-30
Allocating the Cost of Treasury Shares to
Components of Shareholder Equity Upon Formal or
Constructive Retirement
30-7 The
difference between the cost of the treasury shares
and the stated value of a corporation’s common
stock repurchased and retired, or repurchased for
constructive retirement, shall be reflected in
capital.
30-8 When a
corporation's stock is retired, or repurchased for
constructive retirement (with or without an
intention to retire the stock formally in
accordance with applicable laws), an excess of
repurchase price over par or stated value may
be allocated between additional paid-in capital
and retained earnings. Alternatively, the excess
may be charged entirely to retained earnings in
recognition of the fact that a corporation can
always capitalize or allocate retained earnings
for such purposes. If a portion of the excess is
allocated to additional paid-in capital, it shall
be limited to the sum of both of the following:
- All additional paid-in capital arising from previous retirements and net gains on sales of treasury stock of the same issue
- The pro rata portion of additional paid-in capital, voluntary transfers of retained earnings, capitalization of stock dividends, and so forth, on the same issue. For this purpose, any remaining additional paid-in capital applicable to issues fully retired (formal or constructive) is deemed to be applicable pro rata to shares of common stock.
When stock is retired and the repurchase price exceeds the par or stated
value, an entity should apply one of the following three accounting
policies to account for the excess amount:
-
Allocate the excess between APIC and retained earnings in accordance with ASC 505-30-30-8.
-
Charge the excess entirely to retained earnings.
-
Charge the excess entirely to APIC (provided that would not cause APIC to become negative).13
10.4.4.2.2 Par or Stated Value Exceeds Repurchase Price
ASC 505-30
Allocating the Cost of Treasury Shares to
Components of Shareholder Equity Upon Formal or
Constructive Retirement
30-9 When a
corporation’s stock is retired, or repurchased for
constructive retirement (with or without an
intention to retire the stock formally in
accordance with applicable laws), an excess of
par or stated value over the cost of treasury
shares shall be credited to additional paid-in
capital.
When stock is retired and the par or stated value exceeds the repurchase
price, the excess is credited to APIC.
10.4.4.2.3 Other Considerations
ASC 505-30
General
25-2 Laws
of some states govern the circumstances under
which an entity may acquire its own stock and
prescribe the accounting treatment therefor. If
such requirements are at variance with the
requirements of paragraphs 505-30-25-7 and
505-30-30-6 through 30-10, the accounting shall
conform to the applicable law.
Nonauthoritative AICPA Guidance
Technical Q&As Section 4120,
“Reacquisition of Capital Stock”
.03 Repurchase of Stock in Excess of
Retained Earnings and Additional Paid-in
Capital
Inquiry — A corporation has contracted to
repurchase, over a period, some of its own stock.
The corporation does not have sufficient retained
earnings and additional paid-in capital from which
to charge the excess of amounts paid over par
value. How should this repurchase be reflected in
the company’s financial statements?
Reply — In many states, it would not be
legal for a corporation to repurchase shares of
its own stock at a cost greater than the amount of
retained earnings of the corporation. Competent
legal advice as to the effect of the agreement
should be obtained. This may be an executory
contract, with only amounts currently being paid
for considered as repurchases. If this be the
case, only amounts disbursed are to be recognized
in the accounts, with an offset to treasury stock.
There should of course be disclosure in a note to
the financial statements of the date, number of
shares, and amounts of future payments under the
contract. Such future payments would thus include
the interest factor, which would be an additional
cost of the stock, rather than being interest
expense.
However, if legal counsel advises that this is in
fact a completed contract and enforceable, the
full amount should be shown (excluding interest)
as treasury stock, with an offsetting liability.
Again, there should be footnote disclosure of the
nature of the liability and of the interest rate
and maturity dates. Under these circumstances, the
interest would be included as a current
expense.
An entity should apply state law if such law prescribes an accounting
treatment for repurchases of common stock that differs from the guidance
in ASC 505-30. Under ASC 505-30-50-2, an entity must disclose state law
restrictions on the “availability of retained earnings for payment of
dividends” and other effects of a significant nature related to its
repurchase of its outstanding common stock (see Section
10.10.3.3).
Footnotes
11
For example, assume that the holder of the shares is a
private equity firm and that the issuer repurchases the
shares to prevent the holder from obtaining additional board
representation or other influence over the entity. The
entity should compare the repurchase price with the amount
that would be paid to a holder of those shares in a
transaction that is not executed to prevent additional board
representation or other influence over the entity. It would
not be appropriate for the issuer to assume that other
private equity investors would also demand repurchase at the
same price to avoid obtaining additional board
representation or other influence over the entity.
12
See Section 10.4.3.2.2 for
a discussion of the accounting for certain preferred stock
instruments.
13
While ASC 505-30-30-8 does not
specifically mention charging the excess entirely to
APIC, ASC 505-30-30-7 implies that an entity is
permitted to do so. Furthermore, Chapter 1B of ARB
43 previously indicated that such an approach was
acceptable. Although the guidance in ARB 43 that
allowed recognition entirely in APIC was not
codified, the FASB staff has indicated that this is
an acceptable application of U.S. GAAP.