What is Treasury Stock?

Treasury stock, or reacquired stock, is the previously issued, outstanding shares of stock which a
company repurchased or bought back from shareholders. The reacquired shares are then held by
the company for its own disposition. They can either remain in the company’s possession to be
sold in the future, or the business can retire the shares and they will be permanently out of
market circulation.
Treasury stock is one of the various types of equity accounts reported on the balance sheet
statement under the stockholders’ equity section as a contra-equity account. Treasury stock are
shares that a company has repurchased from investors. Once a stock is repurchased the company
can either cancel it, reissue it, or hold onto it.

Rationale Behind Share Repurchases

There are several reasons why companies reacquire issued and outstanding shares from the
investors.

1. For reselling
Treasury stock is often a form of reserved stock set aside to raise funds or pay for future
investments. Companies may use treasury stock to pay for an investment or acquisition of
competing businesses. These shares can also be reissued to existing shareholders to reduce
dilution from incentive compensation plans for employees

2. For controlling interest

The repurchase action lowers the number of outstanding shares, therefore, increasing the value of
the remaining shareholders’ interest in the company. The reacquisition of stock can also prevent
hostile takeovers when the company’s management does not want the acquisition deal to push
through.

3. Undervaluation
When the market is not performing well, the company’s stock may be undervalued – buying
back the shares will usually boost the share price and benefit the remaining shareholders.

4. Retiring of shares
When treasury stocks are retired, they can no longer be sold and are taken out of the market
circulation. In turn, the share count is permanently reduced, which causes the remaining shares
present in circulation to represent a larger percentage of shareholder ownership, including
dividends and profits.

5. For improving financial ratios

If there is a sound motive for the buyback of stocks, the improvement of financial ratios may just
be an after-effect of such good management decisions. This results in an increase in the return on
assets (ROA) ratio and return on equity (ROE) ratio. This then illustrates positive company
market performance.

Treasury stocks are shares which a company buys back or repurchase from its already issued
shares to the public. Or sometimes these shares are kept in the company’s kitty from the start
and are never issued to the public at all.
The treasury stock method implies that the money obtained by the company from the exercising
of an in-the-money option is used for stock repurchases. Repurchasing those shares turns them
into treasury stock, hence the name. Generally Accepted Accounting Principles (GAAP)
mandates that companies must provide details on their diluted EPS

TWO ACCOUNTING METHODS 

 
1. Cost Method   – method prescribed under Philippine accounting standards.
2. Par Value Method 

TWO KINDS OF TREASURY SHARES 

1. Reacquisition by Purchase
 Treasury shares are recorded at cost.
 When treasury shares are reissued or sold at more than cost, the indicated gain is
credited to an account called Share Premium "Treasury Shares.
 When treasury shares are reissued or sold at less than cost, the indicated loss is
debited to Share Premium " Treasury Shares (until exhausted)
 accumulated Profits.
2. Reacquisition by donation
 record the receipt of the donated shares using a memo entry.
 record the sale of the donated shares by crediting “SharePremium - Donated
Capital”

SPECIAL  NOTES 
 Treasury shares do not have the status of outstanding shares.
 Treasury shares do not entitle the holder to the rights of a shareholder.
 Treasury share is not viewed as an asset (investment in trading securities) but as a
reduction to total corporate capital.
 To protect creditors, the law requires that a portion of retained arnings shall be
restricted equal to the cost of the treasury shares.
 Accumulated profit is the account which holds the accumulation of the net earnings
of the corporation