Accounting methods for treasury stock
Accounting practice for treasury stock encompasses two general approaches:
- The cost method
- Par value method
It is important to note that precise rules do not exist for either method. The following discussions focus on the most straightforward types of transactions; further, the equity accounts used are consistent with the simplified concept. That is, the general account Additional Paid In Capital is used instead of more detailed accounts. Unless the amounts are especially material, this approach will produce satisfactory disclosures. If the amounts or circumstances are material, then it is unlikely that account titles will convey all the information that the statement user needs and note disclosure should be provided.
Selecting a method
GAAP allows the use of either the cost or par value methods. When management does not intend to reissue the shares, but also does not desire to formally retire them, it is recommended that the par value method be applied. When the shares are “acquired for later reissuance, or when ultimate disposition has not yet been decided,” the cost method be used. Thus, a firm can use both methods if it has acquired shares for different reasons.
The choice between the methods and the choice among the alternative ways to implement the chosen method seldom have a material impact on the presentation of the firm’s financial position in the balance sheet. While they do produce different amounts within the subcategories of equity, the alternatives do not produce different measures of total stockholders’ equity. This result should not justify haphazard or inconsistent treatment of treasury stock transactions nor s
Following example presents the financial statement disclosure made by American Broadcasting Companies, Inc, related to treasury shares.