8.4 Accelerated Share Repurchase Agreements
8.4.1 Background
ASC 505-30
Accelerated Share Repurchase Programs
25-5 An accelerated share repurchase program is a combination of transactions that permits an entity to repurchase a targeted number of shares immediately with the final repurchase price of those shares determined by an average market price over a fixed period of time. An accelerated share repurchase program is intended to combine the immediate share retirement benefits of a tender offer with the market impact and pricing benefits of a disciplined daily open market stock repurchase program.
25-6 An entity shall account for such an accelerated share repurchase program as the following two separate transactions:
- As shares of common stock acquired in a treasury stock transaction recorded on the acquisition date
- As a forward contract indexed to its own common stock. Subtopic 815-40 provides guidance on the accounting for contracts that are indexed to an entity’s own common stock.
Example 1 (see paragraph 505-30-55-1) provides an illustration of an accelerated share repurchase program that is addressed by this guidance.
Example 1: Accelerated Share Repurchase Program
55-1 This Example illustrates the guidance in paragraph 505-30-25-5 by identifying the two separate transactions, namely a treasury stock purchase and a forward contract, that are present in what is sometimes described as an accelerated share repurchase program.
55-2 The treasury stock purchase is as follows.
55-3 Investment Banker, an unrelated third party, borrows 1,000,000 shares of Company A common stock from investors, becomes the owner of record of those shares, and sells the shares short to Company A on July 1, 1999, at the fair value of $50 per share. Company A pays $50,000,000 in cash to Investment Banker on July 1, 1999, to settle the purchase transaction. The shares are held in treasury. Company A has legal title to the shares, and no other party has the right to vote those shares.
55-4 The forward contract is as follows.
55-5 Company A simultaneously enters into a forward contract with Investment Banker on 1,000,000 shares of its own common stock. On the October 1, 1999, settlement date, if the volume-weighted average daily market price of Company A’s common stock during the contract period (July 1, 1999, to October 1, 1999) exceeds the $50 initial purchase price (net of a commission fee to Investment Banker), Company A will deliver to Investment Banker cash or shares of common stock (at Company A’s option) equal to the price difference multiplied by 1,000,000. If the volume-weighted average daily market price of Company A’s common stock during the contract period is less than the $50 initial purchase price (net of a commission fee to Investment Banker), Investment Banker will deliver to Company A cash equal to the price difference multiplied by 1,000,000.
55-6 Under the guidance in paragraph 505-30-25-5, an entity would account for this accelerated share repurchase program as two separate transactions:
- As shares of common stock acquired in a treasury stock transaction recorded on the July 1, 1999 acquisition date
- As a forward contract indexed to its own common stock.
55-7 See Example 13 (paragraph 260-10-55-88) for the effect on earnings per share (EPS) for this Example.
ASC 260-10
Example 13: Accelerated Share Repurchase Programs
55-88 Example 1 in Subtopic 505-30 (see paragraph 505-30-55-1) illustrates the accounting for what is sometimes described as an accelerated share repurchase program. In that Example, separate transactions involving a treasury stock purchase and a forward contract are addressed. This Example addresses the EPS consequences of those transactions.
55-89 The treasury stock transaction would result in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for both basic and diluted EPS. The effect of the forward contract on diluted EPS would be calculated in accordance with this Subtopic.
In an accelerated share repurchase program, an entity makes an up-front cash
payment (often with the proceeds from the issuance of debt) to repurchase a number of its
own common shares at inception and simultaneously enters into a forward contract to either
issue common shares or receive additional common shares. Under the forward contract, the
entity either (1) pays the counterparty an amount equal to the excess of the
volume-weighted average daily purchase price of the entity’s common shares purchased in
the market by the counterparty over the initial purchase price (net of a commission fee
paid to the counterparty) or (2) receives from the counterparty an amount equal to the
excess of the initial purchase price (net of a commission fee paid to the counterparty)
over the volume-weighted average purchase price of the entity’s common shares purchased in
the market by the counterparty. In certain cases, the settlement of the forward contract
is subject to a cap and a floor price. The entity typically can choose to settle the
forward contract in cash or common stock but in some cases must receive cash when it is in
a gain position.
8.4.2 EPS Accounting
As noted in ASC 505-30-25-6, an accelerated share repurchase program is
accounted for as two separate transactions. The table below outlines how the EPS
accounting related to the two separate transactions is affected when the forward contract
is classified within stockholders’ equity. Note that the forward contract component can
only be dilutive to EPS under the treasury stock method if the entity is in the position
of issuing, as opposed to receiving, common shares.
Table 8-2
Transaction | EPS Accounting |
|---|---|
Treasury stock transaction | The shares of common stock repurchased reduce the number of shares outstanding in the computation of the weighted-average common shares outstanding for basic and diluted EPS. The shares are considered repurchased as of the acquisition date. If an entity receives shares of common stock on multiple dates, the shares of common stock should not be reduced in the calculation of the weighted-average shares of common stock outstanding before their receipt. |
Forward contract | Basic EPS — If the forward contract meets the definition of a participating security, the two-class method of EPS must be applied. See Section 5.3.3.5 for a discussion of when a forward contract meets the definition of a participating security. If the forward contract does not meet the definition of a participating security and is equity-classified, it will have no impact on basic EPS before settlement. On settlement, basic EPS will be affected by the additional shares of common stock issued or received (on a weighted-average basis). Diluted EPS — The entity applies the treasury stock method to determine
the dilution (or if the forward contract meets the definition of a
participating security, the more dilutive of the treasury stock method or
two-class method of calculating diluted EPS).
ASC 260-10-45-21A states, in part, that if “the number of
shares to be included in the diluted EPS denominator is affected by the
entity’s share price . . . [i]n applying . . . the treasury stock method . . .
, the average market price shall be used for purposes of calculating the
denominator for diluted EPS . . . , except for contingently issuable shares
within the scope of the guidance in paragraphs 260-10-45-48 through 45-57.” In
accordance with this guidance, an entity must determine whether it believes
that the guidance on contingently issuable shares in ASC 260-10-45-52 applies
to determining the impact of the forward contract on diluted EPS. Because it
is unclear whether that method should be applied to this contract, it is
acceptable for an entity to determine the impact of the forward contract on
diluted EPS by applying either (1) the guidance on variable denominators in
ASC 260-10-45-21A or (2) the guidance on contingently issuable shares in ASC
260-10-45-52.3 The approach selected should be applied consistently to all similar
contracts.
The ability to choose between these two approaches is
consistent with our informal discussions with the FASB staff. In these
discussions, the staff noted that the FASB did not intend for ASU 2020-06 to
change when entities apply the contingently issuable share method to calculate
diluted EPS. The staff also acknowledged that because the current guidance in
ASC 260 is unclear on this matter, there may be diversity in practice
regarding when the contingently issuable share method is applied.
Note that even if the entity has the option of settling the
payment in cash or shares, share settlement must be applied in the calculation
of diluted EPS in accordance with ASC 260-10-45-45 (see Section 4.7). In some situations, an accelerated share repurchase may be structured in such a way that the entity can only receive additional shares of common stock upon settlement of the forward contract for no additional consideration. In such circumstances, the receipt of additional shares of common stock would be antidilutive and therefore no adjustments may be made in the computation of diluted EPS. That is, the shares of common stock potentially receivable under the forward contract should only reduce the denominator in the EPS calculations (on a weighted basis) when and if received and should not be included in diluted EPS before receipt because of the antidilutive impact. |
If an entity classifies the forward contract as an asset or liability, the
accounting for basic EPS will be similar to that for an equity-classified forward contract
(i.e., the two-class method will be applied if the forward contract is a participating
security). In calculating diluted EPS, the entity must consider whether the forward
contract must be settled in cash or whether it permits the entity or the counterparty to
choose to settle any obligation of the entity under the forward contract in cash. The
accounting for diluted EPS, which depends on this consideration, is as follows:
-
Forward contract must be settled in cash — The forward contract is classified as an asset or liability and remeasured to fair value in each period, with changes in fair value reported in earnings. Since the settlement of the contract will not result in any exchange of common shares, no further adjustment is needed in the calculation of diluted EPS.
-
Forward contract allows the entity to settle its obligation in cash or shares — As discussed in Section 4.7, when an entity is permitted to choose whether to settle a contract in cash or common shares, it is presumed that the contract will be settled in common shares. This presumption may not be overcome. Therefore, the impact on the denominator in the calculation of diluted EPS is the same as that when the forward contract is classified in equity (see above). However, the entity must also adjust the numerator to reverse any mark-to-market adjustment recognized in earnings during the period. The entity must consider that adjustment, along with the incremental shares included in the denominator, to determine whether the effect is dilutive to EPS. See Section 4.7.3 for further discussion of contracts that may be settled in cash or shares that are classified as assets or liabilities for accounting purposes.
-
Forward contract allows the counterparty to receive cash or shares — If the counterparty can elect to receive cash or shares from the entity as payment of the entity’s obligation, the forward contract is classified as an asset or liability and measured at fair value through earnings. In such circumstances, the entity must assume share settlement of the contract if the effect is dilutive. In applying the treasury stock method, the entity must adjust the numerator to reverse the mark-to-market impact during the financial reporting period with respect to recording the forward contract as an asset or liability. This accounting for diluted EPS is similar to that employed when the entity can choose to settle its obligation in cash or shares. See Section 4.7.3 for further discussion of contracts that may be settled in cash or shares that are classified as assets or liabilities for accounting purposes.
Footnotes
3
Under this approach, an entity would use the
end-of-period stock price to determine whether it would issue or receive
consideration under the forward contract. If the entity would be in the
position of issuing shares, it should include the shares that it would be
required to deliver to the counterparty in the denominator of the
calculation of diluted EPS. Those shares would be considered outstanding
for diluted EPS for the entire period in which the forward contract was
outstanding during the reporting period. (Note that an average stock price
may be used in lieu of the end-of-period stock price under this approach
if the settlement is based on a weighted-average stock price; for example,
if the settlement is based on the weighted-average closing stock price
over the 20 trading days ending 3 trading days before settlement, in lieu
of using the end-of-period stock price, the entity would use the average
closing price of its common stock for the 20 trading days ending 3 trading
days immediately preceding the end of the reporting period).