Treasury Stock

Treasury stock, also called treasury shares or reacquired stock, consists of shares that a corporation previously issued and then repurchased from shareholders, and that it holds rather than retiring. The shares remain issued but are no longer outstanding. While held in treasury they have no voting rights, receive no dividends and are excluded from earnings per share calculations.

Companies buy back shares to return cash to shareholders, offset dilution from employee stock options, signal that management believes the shares are undervalued, adjust their capital structure or have shares available for acquisitions. Treasury stock is not an asset, because a company cannot own itself; it is reported as a contra account that reduces total stockholders' equity.

Most US companies use the cost method. When shares are repurchased, the company debits treasury stock and credits cash for the amount paid, regardless of the shares' par value or original issue price. Treasury stock then appears at the bottom of the equity section as a deduction.

When treasury shares are reissued, the difference between the reissue price and their cost is never recorded as a gain or loss in the income statement, because a company cannot earn income by trading in its own shares. Instead:

• If shares are reissued above cost, the excess is credited to paid-in capital from treasury stock, a component of paid-in capital.
• If shares are reissued below cost, the shortfall is debited first to any paid-in capital from earlier treasury stock transactions, and any remainder to retained earnings.

Some companies use the par value method, which treats a repurchase more like a retirement, or formally retire repurchased shares, in which case the shares are cancelled and the cost is removed from common stock, paid-in capital and retained earnings.

A company with 1,000,000 shares of $1 par common stock outstanding buys back 50,000 shares at $40. It debits treasury stock and credits cash for $2,000,000. Outstanding shares fall to 950,000, and total equity falls by $2,000,000.

Later it reissues 20,000 treasury shares at $46. It debits cash $920,000, credits treasury stock $800,000 for their cost, and credits paid-in capital from treasury stock $120,000. It then reissues another 20,000 shares at $33. Cash is debited $660,000 and treasury stock credited $800,000. The $140,000 shortfall is debited first to paid-in capital from treasury stock, using the $120,000 balance, and the remaining $20,000 to retained earnings. The remaining 10,000 treasury shares stay on the books at $400,000.

Buybacks reduce the number of outstanding shares, so earnings per share rise even if net income does not change. If the company earns $3,800,000, EPS is $3.80 on 1,000,000 shares but $4.00 on 950,000. Because equity falls, return on equity rises and book value per share may rise or fall depending on the price paid. Analysts therefore check whether EPS growth comes from higher profits or simply from a shrinking share count.

State corporate laws restrict buybacks that would leave a company unable to pay its debts or that would impair its legal capital, and some states do not recognize treasury shares at all, treating repurchased shares as authorized but unissued. For US public companies, SEC Rule 10b-18 provides a safe harbor from manipulation claims if buybacks follow conditions on timing, price, volume and the broker used, and quarterly reports disclose repurchase activity. Since 2023, a 1 percent federal excise tax applies to the fair market value of stock repurchased by covered US public corporations, reduced by the value of shares issued during the year. Under IFRS, the treatment is similar: IAS 32 requires treasury shares to be deducted from equity, with no gain or loss recognized in profit or loss.