Treasury Stock

What is Treasury Stock?

Treasury Stocks are the set of shares which the issuing company has bought back from the existing shareholders of the company but not retired and thus they are not considered while calculating the earning per share or the dividends of the company.

These are the shares reacquired by the issuing company, from the shareholders, but not yet retired by the company. They reduce shareholder equity. Treasury Shares do not represent an investment in the firm. Also, it does not receive a dividend and has no voting rights. These treasury shares are not taken into account while calculating dividends or earnings per share (EPSEPSEarnings Per Share (EPS) is a key financial metric that investors use to assess a company's performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.read more).

Treasury Stock in the Balance Sheet

The company reports treasury Shares at the end of the line items within the equity section. When the company repurchases the stock, it records the expenditure due to repurchase in a contra-equity account. Thus the direct effect of writing a treasury stock transaction is a reduction in the total amount of equity recorded in the balance sheet. It lists in the balance sheet as a negative number under shareholders’ equityNegative Number Under Shareholders' EquityNegative shareholders equity refers to the negative balance of the shareholder's equity, which arises when the company's total liabilities are more than the value of its total assets. The reasons for such negative balance include accumulated losses, large dividend payments, and large borrowing for covering accrued losses.read more.

The two methods of accounting treasury stock are cost method and the par value method. In the cost methodCost MethodThe cost method is a method of accounting for investments in which the investment remains at its original cost on the balance sheet. Many financial instruments, such as investments and inventory/fixed assets, are accounted for using this method.read more, the paid-in capital account is reduced in the balance sheet when treasury shares are purchased. Under the par value method during repurchase, the books will record it as the retirement of shares. Thereby, common stock debits, and treasury stock credits. But in both methods, the transactions can’t increase the amount of retained earnings.

The example below from Colgate shows how treasury shares impact the shareholder’s equity of a company.

What-is-Treasury-Stock

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For eg:
Source: Treasury Stock (wallstreetmojo.com)

We see that Shareholder’ equity reduces by Treasury shares and is a negative number. Colgate follows the cost method and had $19.135 billion worth of Treasury Shares as of December 31, 2016.

Treasury Stock Examples

Treasury Shares Example – Colgate

Treasury stock Example - Colgate

source: Colgate SEC Filings

We note from above that Colgate has been buying back shares each year.

Difference Between Treasury stocks and Outstanding shares

Treasury StocksOutstanding Shares
Treasury Shares  have no voting rightsOutstanding SharesOutstanding SharesOutstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner's equity in the liability side of the company's balance sheet.read more Has voting rights
These do not receive any dividendsAll shareholders of the other outstanding shares receive a dividend
The company don’t include Treasury Shares in the calculation of outstanding sharesIncluded in the calculation of outstanding shares
Treasury Shares cannot exercise privileged rights as shareholdersCan exercise privileged rights as shareholders
Every country’s governing body regulates the number of such stocks a company can hold.No such restriction applies to other outstanding shares.
Treasury Shares do not receive assets on company liquidation. A shareholder of the other outstanding shares receives assets on company liquidationCompany LiquidationLiquidation is the process of winding up a business or a segment of the business by selling off its assets. The amount realized by this is used to pay off the creditors and all other liabilities of the business in a specific order.read more.

Reasons for Share Buy Back

There are numerous reasons behind the buyback of issued sharesBuyback Of Issued SharesShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company.read more from the open market as well as the investors. Some of the reasons are listed below:

Treasury Stock Video

 

This article has been a guide to what is Treasury Stock. Here we discuss treasury stocks in the balance sheet, and it’s accounting along with practical examples. We also discuss differences between treasury shares and outstanding shares and the reasons why a company goes for buybacks. You can learn more about Corporate Finance here –

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