Accounting for Stock BuyBack and Retirement (ASC 505-30)

When a company buys back its stock from investor(s), there are two basic approaches depending on whether their intention is to hold those shares in the treasury for future use/reissue, or permanently retire them. Guidance on recording this is found in US GAAP (Accounting Standards Codification) ASC 505-30 which covers treatment of Treasury Stock.

SCENARIO: A company returns repurchased shares to its treasury.

Such purchases are not considered assets because companies, as a rule, do not invest in their own stock. Rather, this return of stock to the treasury is treated as a reduction against its shareholders’ equity account on the balance sheet, since these shares are no longer outstanding. Therefore, the repurchase of shares is a ‘contra-equity’ account.

Such transactions are dealt with on the Balance Sheet (and the related Statement of Shareholders’ Equity). Generally, the transaction does not result in any gains or losses running through the income statement. Any gains on these shares are credited to the Additional Paid-in Capital (A.P.I.C.) account, and losses are charged against any previous gains first, and then any remainder is charged directly to Retaining Earnings.

These moves bypass the income statement altogether.

A convenient and brief bullet-point list of all of ASC 505 (including section 30) is found here: http://www.accountinginfo.com/financial-accounting-standards/asc-500/505-30-treasury-stock. Of course, it is more fully found in the US GAAP codes.

Two Accounting Method:

[1]  Cost Method– This method is used when holding the shares in treasury for later resale (or later retirement). Often, such share repurchases are used for stock option exercises or other types of incentive stock compensation.

Journal Entry to record the transaction:

DR: Treasury Stock (at cost of the buy back: # shares x $ price paid/share)
CR: Cash (for same)

[2]   Constructive Retirement Method – Shares repurchased are immediately retired (no plan to reissue):

Journal Entry to record the transaction:

DR: Common Stock (C.S.) at par
DR: A.P.I.C. (using the price the stock was originally sold for)
DR: Retained Earnings (difference, if repurchase price > original issue price), OR
CR: Contributed Capital from Retired Shares (a)
CR: Cash (amount paid in the repurchase)

Note (a): If there is a credit to balance this transaction; no new equity is created, but the source of the credit is a form of APIC and could be presented separately on the balance sheet in the Shareholders’ Equity section (In fairness, most choose no distinction, while others do separate it as its own APIC account.) In any case, the details of the repurchase is presented in the Statement of Shareholders’ Equity.

Corporate Governance / Legal Considerations:

Of course, there are some formal Board of Directors actions / resolutions needed to authorize the repurchase and/or retirement as dictated in the corporations article and bylaws.

In addition, there may also be a requirement to report these stock transactions to the SEC and state of incorporation. But these matters are not part of this article.

Social-Tech Buzz Terms

We come across these terms in things we read. Some commonly used buzz words. I’ll add to this as I think of them:

API – Application programming interface

CMS – Content management system

Enterprise 2.0 – Enterprise social software, such as Jive and Yammer

Gamification – Assigning point values and rating usage to encourage adoption of social / collaboration solutions within an organization by its employees.

GIF – Graphics Interchange Format (a picture file)

SEO – Search engine optimization

SMS – Short message service (text messages)

SSO – Single sign on

Wiki – A collection of web pages

Silicon Valley VC Observation

There is a publicly traded “VC” firm called GSVC which has put about $250-$300M in 30-40 private company investments, mostly in the Silicon Valley.

I came across this when Facebook was going public and GSVC was mentioned in an article as a way to get in on Facebook before the IPO “pop” (which didn’t come of course). So I looked into this company and generally liked the idea of buying into private companies using a publicly traded stock.

However, I didn’t buy any, which was a good thing since the GSVC stock was trading on the FB hype and that premium has since evaporated. The stock trades in the $8 range vs a NAV in the $12 range (NAV being what mgmt. thinks its portfolio is worth, which is open to interpretation). I’m not sure it’s a good buy, but I’m keeping an eye on it.

GSVC’s top 10 holdings include Twitter, Dropbox and Facebook. I am a big fan of twitter, but twitter says it’s not interested in going public yet. So that value may take time to be unlocked.

Anyway, I watch this VC / company to get an insight into VC activity and trends. I was interested to know that the composition of their portfolio because includes a healthy dose of education-tech holdings. See the slideshow from their 1st quarter 2013 investor presentation on their website (www.gsvcap.com).

Their biggest sectors make up 82% of their portfolio and they are:

• Education-Tech 32%
• Social mobile 24%
• Cloud / big data 26%