Treasury stock

From Academic Kids

In finance, a treasury stock or reacquired stock is stock which is bought back by the issuing company. It reduces the amount of outstanding stocks on the open market ("open market" including insiders holdings). On the balance sheet, treasury stock is listed under shareholder equity as a negative number. Sometimes, companies do this when they feel that their stock is undervalued on the open market. Other times, companies do this to provide a "bonus" or incentive compensation plans for employees. Rather than receive cash, the recipient would get an asset that might appreciate in value faster than cash saved in a bank account.

Limitations of treasury stock include:

  • Treasury stock does not pay dividend
  • Treasury stock has no voting rights
  • Total treasury stock can not exceed 5% of total capitalization

After buyback, the company can either retire the shares or hold the shares for later resell. Buying back stocks reduces the number of outstanding shares, thus it can cause the value of outstanding shares to appreciate. In addition, it can serve as a signal to investors.

One way of accounting for treasury stock is with the cost method. In this method, the paid-in capital account is reduced in the balance sheet when the treasury stock is bought. When the treasury stock is sold back on the open market, the paid-in capital is either debited or credited if is sold for more or less than the initial cost respectively.

Regulatory

In the US, the Companies Act of 1955 dissallowed companies from holding their own shares. However, the Companies Act of 1993 later repealed this.

See also

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