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Author: gym0 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 120780  
Subject: buy backs Date: 10/14/2002 1:15 PM
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I asked an accounting question on another board and a TMF advised
me to use this board. I am interested in the accounting of a
company share buy back program. Not interested in pros or cons
of using this device.
1. When a company buys stock on open market, I assume they pay
cash. What asset account do they credit?

2. What happens to actual shares purchased? Do they simply keep
the actual certificate? Or is there a procedure used to
eliminate the stock? Does this have any bearing on the
number of shares authorized to issue, but not issued?

3. If, at a later date, share options are exercised at a price
much lower than market price, but at the same price company
paid when they purchased shares on open market, can
these shares be involved in that transaction? If so, how
would this be done on companies books?

4. If company must purchase shares to transfer to option
taker, do the just debit cash and credit expense account
for the difference in value?

As you can see from these questions, I am not an expert in this area.
My talent lies in a card game called "go fish". If any of you
would like some pointers please feel free to ask.

My thanks to whoever answers these questions for me.



gym0
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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61710 of 120780
Subject: Re: buy backs Date: 10/14/2002 3:48 PM
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1. They do indeed pay cash (would you part with your shares if Boeing tried to pay in trade?). The cash is reduced on the BS and a contra-account called "treasury stock" is credited. Treasury stock is in the shareholders' equity section of the BS.

2. Many times the shares just sit in the "treasury stock" account. This suggests that they may be reissued at some point, and in fact that is usually what happens. A stock acquisition is done, incentive options get exercised or maybe the company needs to raise capital, and the shares are re-sold. However, sometimes a company will permanently retire the shares, effectively ripping up the stock certificates. In this case, the treasury stock contra account is reduced and retained earnings is reduced. Since the corporation can re-issue the shares at will, this is mostly symbolic.

3. These shares may be the ones bought on the open market, but it doesn't affect the accounting as explained above.

4. The difference in value is not recognized anywhere under current accounting, regardless of whether the company issues new shares to the option-holder or buys them in the open market. That's what all the fuss is about WRT options accounting.

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Author: ValueMonger Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61716 of 120780
Subject: Re: buy backs Date: 10/14/2002 7:59 PM
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"1. When a company buys stock on open market, I assume they pay
cash. What asset account do they credit?"

Since they are paying cash (99% of the time)for the stock, then cash is the credited account and a contra-equity account called Treasury stock is debited. A contra-equity account is tread similarly to a contra-asset account like accumulated depreciation.

"2. What happens to actual shares purchased? Do they simply keep
the actual certificate? Or is there a procedure used to
eliminate the stock? Does this have any bearing on the
number of shares authorized to issue, but not issued?"

Normally the stock is either retired (done away with)or held as treasury stock for a while. A while can be years to decades, ultimately the treasury stock is usually retired or issued back out. The total amount of shares authorized normally only changes when the company goes back to the state of incorporation (most often Delaware) and changes their charter to issue more shares. On some balance sheet (the more detailed balance sheets) you will sometimes see the following
authorized x, issued y, and outstanding z. The difference between Y and Z is treasury shares.

"3. If, at a later date, share options are exercised at a price
much lower than market price, but at the same price company
paid when they purchased shares on open market, can
these shares be involved in that transaction? If so, how
would this be done on companies books?"

If the shares are sold (maybe the same rules apply for issuing for stock options) at a price over the price paid for the treasury stock the entry will be :

Cash
Treasury Stock
PIC from treasury stock

If the shares were issued at prices below the what was paid for the treasury stock then the entries are:

Cash
Paid in capital from treasury stock (or see note 1)
Treasury stock

Note 1: If there is no paid in capital from treasury stock then retained earnings are debited (reduced).

If you go to a lot of tech stocks Cisco, Nortel, etc., you will very little retained earnings for this reason.

4. If company must purchase shares to transfer to option
taker, do the just debit cash and credit expense account
for the difference in value?"

The company doesn't have to purchase the shares they issue due to options, although some do. Most certainly in the past haven't expensed anything, but more will in the future. The accounts involved were cash and various owners equity accounts. The total effect in both actuallity and the accounting, in the past, was a transfering of ownership from the stockholders to the option recepients.

My financial accounting text book is 100 miles away at present and this is the best I can do from memory. If you have any other questions reply and I will look it up.



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Author: ValueMonger Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61718 of 120780
Subject: Re: buy backs Date: 10/15/2002 12:27 AM
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Oops the posting monster ate my indentations for the credits from my previous post. So make it;

"If the shares are sold (maybe the same rules apply for issuing for stock options) at a price over the price paid for the treasury stock the entry will be :

Cash
...Treasury Stock
...PIC from treasury stock

If the shares were issued at prices below the what was paid for the treasury stock then the entries are:

Cash
Paid in capital from treasury stock (or see note 1)
...Treasury stock

Note 1: If there is no paid in capital from treasury stock then retained earnings are debited (reduced)."




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Author: gym0 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61719 of 120780
Subject: Re: buy backs Date: 10/15/2002 12:38 AM
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hate to clutter up board with note that should be Email. But
address to Valuemonger was returned, so if I want to thank him
I have no option except this board. If you read this, there
is no disrespect intended for lawyers or accounts, but you do tend
to be a little wordy.

------------------------------------------------------------------------
ValueMonger:

Thanks for the answers I was looking for.

"The total effect in both actuallity and the accounting, in the past, was a transfering of ownership from the stockholders to the option
recepients."

I read your profile and saw that you attended West Point.

In my far distance background is a little service in the Army. I rose to the lofty rank of corporal and defended Fort Benning during the Korean War.

Your reply was simple and direct. A rare find in the world of lawyers,
governments, accountants, and a whole lot of women I have known.

The reason for bringing up the military is that West Point
produced people that were excellent at giving simple direct answers.
I suspect that is the background of your reply.

Thanks again gym0

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