IFRS 7 Best accounting for Treasury shares

IFRS 7 Best accounting for Treasury sharesTreasury shares are previously outstanding shares bought back from shareholders by the issuing company.

IFRS does not mandate a specific method of presenting treasury shares within equity. However, local laws may prescribe the allocation method. Therefore, an entity needs to take into account its legal environment when choosing how to present its own shares within equity.

Presentation format explanations

An entity needs to choose a presentation format, to be applied consistently to all treasury shares. Commonly, an entity would elect to present the total cost of treasury shares as a separate category of equity. [IAS 32 33] IFRS 7 Best accounting for Treasury shares

i. Ordinary shares IFRS 7 Best accounting for Treasury shares

Holders of these shares are entitled to dividends as declared from time to time and are entitled to one vote per share at general meetings of the Company. All rights attached to the Company’s treasury shares are suspended until those shares are reissued. [IAS 1 79(a)(v)] IFRS 7 Best accounting for Treasury shares

v. Treasury share reserve IFRS 7 Best accounting for Treasury shares

The treasury share reserve comprises the cost of the Company’s shares held by the Group, unless the shares are underlying items of direct participating contracts or qualifying plan assets held by the Group’s employee benefit plans (see Note 44(R)(ii)). At 31 December 2021, the Group held 9.6 million treasury shares (2020: 10.0 million). [IAS 1 79(a)(vi), IAS 32 34]

The Group has elected to disclose the number of treasury shares held in the notes. Alternatively, it may be disclosed in the statement of financial position or the statement of changes in equity.

On transition to IFRS 17, the Group elected to recognise the Company’s own shares that are held as underlying items of participating contracts as if they were financial assets. These shares are mandatorily measured at FVTPL. Previously, these shares were treated as treasury shares. [IFRS 7 42I–42J] IFRS 7 Best accounting for Treasury shares

Treasury sharesGroup treasury function

The cost of an entity’s own equity instruments that it has reacquired (‘treasury shares’) is deducted from equity. IFRS 7 Best accounting for Treasury shares

  • Gain or loss is not recognised on the purchase, sale, issue, or cancellation of treasury shares. IFRS 7 Best accounting for Treasury shares
  • Treasury shares may be acquired and held by the entity or by other members of the consolidated group (i.e. an entity and its subsidiaries)
  • Consideration paid or received is recognised directly in equity. [IAS 32 33] IFRS 7 Best accounting for Treasury shares

When an entity reacquires its own equity instruments, consideration paid is recognized in equity and transaction costs are accounted for as a deduction from equity under IAS 32 33, IAS 32 35.

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The transaction costs that should be recognized as a deduction from equity are only incremental costs directly attributable to the equity transaction. The remaining transaction costs (e.g., general administrative costs) should be expensed as incurred. IFRS 7 Best accounting for Treasury shares

However, when, and only when, an entity reacquires its own equity instrument and includes the share as an underlying item of direct participating contracts, an entity may elect not to deduct the reacquired instrument from equity and instead account for the reacquired instrument as if it were a financial asset and measure it at FVTPL. This election is irrevocable and is made on an instrument- by-instrument basis. [IAS 32 33A] IFRS 7 Best accounting for Treasury shares

Specific restrictions IFRS 7 Best accounting for Treasury shares

At the 2018 AGM, shareholders authorised the Directors to make market purchases up to a maximum of approximately 10 per cent of the Company’s issued share capital (being £9,599,845 in nominal value) excluding treasury shares. Any shares purchased under this authority may either be cancelled or may be held as treasury shares provided that the number of shares held does not exceed 10 per cent of issued share capital. No shares were bought back during the year. IFRS 7 Best accounting for Treasury shares

Cash flows from financing activitiesIFRS 7 Best accounting for Treasury shares

IAS 7 17(a) Proceeds from sale of treasury shares IFRS 7 Best accounting for Treasury shares

IAS 7 17(b) Repurchase of treasury shares IFRS 7 Best accounting for Treasury shares

The sale and repurchase of treasury shares is included in cash flows from financing activities in the Statement of Cash Flows.

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Computation of earnings per share in a reverse acquisition

In a reverse acquisition, the financial statements of the combined entity reflect the capital structure (i.e., share capital, share premium and treasury capital) of the legal acquirer (accounting acquiree), including the equity interests issued in connection with the reverse acquisition. Consistent with this financial statement presentation, the computation of EPS is also based on the capital structure of the legal acquirer.

Presentation example

Statement of Financial position

(Amounts in CU ‘000)

31/12/X2

31/12/X1

Share capital IFRS 7 Best accounting for Treasury shares IFRS 7 Best accounting for Treasury shares

53,799

53,799

Treasury shares reserve IFRS 7 Best accounting for Treasury shares IFRS 7 Best accounting for Treasury shares

-3,884

-4,077

Retained earnings IFRS 7 Best accounting for Treasury shares IFRS 7 Best accounting for Treasury shares

140,225

137,785

Total equity

190,140

187,507

Statement of changes in equity

(Amounts in CU ‘000)

Share capital

Treasury shares reserve

Retained earnings

Total

Opening balance

53,799

-4,077

137,785

187,507

Net income for the year

5,045

5,045

Dividend paid

-2,605

-2,605

Repurchase of treasury shares

-350

-350

Proceeds from sale of treasury shares

543

543

Closing balance

53,799

-3,884

140,225

190,140

Repurchase of treasury shares and proceeds from sale of treasury shares are net of incremental cost directly attributable to these respective equity transactions.

Listed shares

Not really IFRS related, but keep in mind that for listed shares there are in most countries strict rules for the repurchase of issued shares by the issuing entity, due to share price sensitivities and the avoidance of share price manipulations by the issuing entity or its broad range of stakeholders, also in cases of IPO’s (in IPO’s also for the consortium of banks and brokers supporting the IPO). Here is an example:

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EXAMPLE

Efficient PLC purchases two million 10p shares on the market for £3.50 each, with the intention of holding them as treasury shares. They are subsequently resold for £4.50. The accounting entries will be as follows:

Purchase

Cost of purchase = 2m x £3.50 = £7m (reduction in cash). Retained earnings are reduced by a corresponding £7m.

(Amounts in £ ‘000)

Repurchase of treasury sharesEquityTreasury shares reserve

7,000

Cash

7,000

To record the repurchase of shares issued to shareholders

Presentation in statement of changes in equity

(Amounts in £ ‘000)

Share capital

Share premium

Treasury shares reserve

Retained earnings

Total

Opening balance

20,000

380,000

1,500,000

1,900,000

Repurchase of treasury shares

7,000

-7,000

Closing balance

20,000

380,000

7,000

1,493,000

1,900,000

Sale

Proceeds received = 2m x £4.50 = £9m (cash increases).

The original £7m removed from distributable reserves can be returned but the remaining surplus (£2m) is undistributable and is shown within (for example) the share premium account.

(Amounts in £ ‘000)

Cash

9,000

Sale of treasury shares – Equity – Treasury shares reserve

7,000

Equity – Share premium

2,000

To record the sale of shares to shareholders

Presentation in statement of changes in equity

(Amounts in £ ‘000)

Share capital

Share premium

Treasury shares reserve

Retained earnings

Total

Opening balance

20,000

380,000

7,000

1,493,000

1,900,000

Sale of treasury shares

2,000

-7,000

7,000

2,000

Closing balance

20,000

382,000

1,500,000

1,902,000

This example does not attempt to illustrate the variety of alternative presentations that can be used by companies – in common with IFRS that does nFinancial instruments Basic risksot prescribe a particular method.

By way of comparison, if the shares had been cancelled and then new shares issued subsequently, retained earnings would have remained at £1,493m.

Food for thought

Unlike new shares, treasury shares can only be sold for cash (including foreign currency) unless they are being transferred as part of an employee share scheme. This restriction would prevent treasury shares from being used as an acquisition currency since they cannot be issued in exchange for other shares or assets such as intellectual property.

Companies will be unable to sell treasury shares during close periods, or whilst they are the subject of a takeover bid.

Treasury shares can be sold for less than their nominal value (unlike new shares) enabling companies to raise cash even when the share price is severely depressed without the need for a capital restructuring first.

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IFRS 7 Best accounting for Treasury shares

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