Financial Reporting FR

SIC-16 Share Capital – Reacquired Own Equity Instruments (Treasury Shares)

SIC-16 Share Capital – Reacquired Own Equity Instruments (Treasury Shares)
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Definitions and Explanations:

Under SIC-16, treasury shares are considered to be a part of a company’s equity capital. They represent the company’s own shares that have been reacquired by the company and are being held in its treasury for various purposes, such as future issuance, employee stock option plans, or other corporate purposes. SIC-16 provides guidance on how to account for treasury shares in the company’s financial statements.

The key accounting treatment related to treasury shares under SIC-16 is as follows:

Cost Method:

Under the cost method, treasury shares are recorded at their cost of acquisition, which includes the purchase price paid to acquire the shares and any directly attributable costs of acquisition. Treasury shares are deducted from equity and shown as a reduction of share capital in the company’s financial statements.

 

Earnings per Share (EPS):

Treasury shares are excluded from the calculation of EPS as they do not represent outstanding shares available to shareholders.

 

Examples:

Let’s consider some examples to better understand how treasury shares are accounted for under SIC-16.

 

Example 1: Acquisition of Treasury Shares

Company A buys back 10,000 of its own shares at a cost of $20 per share. The total cost of acquiring the treasury shares is $200,000. Under SIC-16, Company A would record the treasury shares at their cost of acquisition, which is $200,000, and deduct it from the share capital in its financial statements.

 

Example 2: Sale of Treasury Shares

Company B sells 2,000 treasury shares at $25 per share. The total proceeds from the sale of treasury shares amount to $50,000. Under SIC-16, Company B would record the proceeds from the sale of treasury shares as an increase in cash or other appropriate accounts, and reduce the treasury shares by the same amount in its financial statements.

 

Case Studies:

Let’s look at some case studies that highlight the application of SIC-16 in real-world scenarios.

Case Study 1: Treasury Shares for Employee Stock Option Plans

Company C, a technology company, has a stock option plan for its employees. As part of the plan, Company C purchases its own shares from the market to be used as stock options for its employees. The shares purchased are held in the company’s treasury until they are granted to employees. Under SIC-16, Company C would account for the treasury shares using the cost method, recording the shares at their cost of acquisition and deducting it from the share capital in its financial statements. When the shares are granted to employees, Company C would account for the stock options separately as per the relevant accounting standards.

 

Case Study 2: Treasury Shares for Future Issuance

Company D, a manufacturing company, decides to buy back its own shares to be held in treasury for future issuance. The company believes that the shares are currently undervalued and intends to issue them in the future when the share price is expected to increase. Under SIC-16, Company D would account for the treasury shares using the cost method, recording the shares at their cost of acquisition and deducting it from the share capital in its financial statements. The treasury shares would be shown as a reduction of share capital until they are issued in the future, at which point they would be reclassified as issued share capital. The difference between the cost of acquisition and the proceeds from the future issuance of treasury shares would be recognized as additional paid-in capital in the financial statements.

 

Case Study 3: Treasury Shares for Shareholder Return Programs

Company E, a retail company, decides to implement a shareholder return program, wherein it buys back its own shares and cancels them to return excess cash to its shareholders. The shares bought back are held in the company’s treasury until they are canceled. Under SIC-16, Company E would account for the treasury shares using the cost method, recording the shares at their cost of acquisition and deducting it from the share capital in its financial statements. When the shares are canceled, the share capital would be reduced by the cost of acquisition of the treasury shares, and the excess of the purchase price over the par value of the shares would be recognized as a reduction of retained earnings.

 

Conclusion:

SIC-16 provides guidance on the accounting treatment of treasury shares, which are reacquired own equity instruments, in accordance with IFRS. Treasury shares are recorded at their cost of acquisition and are deducted from share capital in the financial statements. Treasury shares are excluded from the calculation of EPS and may be held in the company’s treasury for various purposes, such as future issuance, employee stock option plans, or other corporate purposes. Examples and case studies help illustrate the application of SIC-16 in real-world scenarios, highlighting how companies account for treasury shares in their financial statements. Compliance with SIC-16 ensures that companies accurately reflect the impact of treasury shares on their equity capital and provide transparent information to their stakeholders.