How Share Buybacks Affect Equity and Earnings per Share Presentation

Graziano Stefanelli
4 hours ago
4 min read

Share buybacks, also known as treasury share repurchases, occur when a company reacquires its own shares from the market. Under IFRS (IAS 32) and US GAAP (ASC 505-30), repurchased shares are recorded as a deduction from equity, not as an asset, because a company cannot own part of itself. The accounting treatment focuses on maintaining the integrity of total shareholders’ equity and ensuring that per-share performance measures, such as Earnings per Share (EPS), reflect the reduced number of outstanding shares.

Buybacks influence liquidity, leverage, capital management, and valuation ratios. Both IFRS and GAAP aim to ensure that transactions in the entity’s own equity instruments are presented transparently and without income statement distortion.

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How treasury shares are recognized and measured

When shares are repurchased, they are recognized at cost as a deduction from total equity. The repurchase has no impact on profit or loss.

Example — share repurchase:A company buys back 100,000 shares at 20 each.

Entry:

Debit: Treasury Shares (Equity) 2,000,000
Credit: Cash 2,000,000

IFRS (IAS 32.33):The cost of own shares purchased is deducted directly from equity.

US GAAP (ASC 505-30):Two methods are permitted:

Cost method — record treasury shares at repurchase cost.
Par value method — record at par value, adjusting additional paid-in capital (APIC) for any difference.

Under both frameworks, treasury shares remain part of issued share capital but are excluded from the calculation of outstanding shares.

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How reissuance or cancellation of treasury shares is accounted for

Reissuance:When treasury shares are later reissued, any difference between reissue price and cost is recognized in equity, not profit or loss.

Example:Reissue 50,000 treasury shares at 22 (cost was 20).

Entry (Cost method):

Debit: Cash 1,100,000
Credit: Treasury Shares 1,000,000
Credit: Additional Paid-In Capital – Treasury 100,000

If reissued below cost (e.g., at 18), the difference reduces APIC first, and if insufficient, retained earnings.

Cancellation:When treasury shares are permanently cancelled, both share capital and APIC are reduced in proportion to the par value and repurchase cost.

Entry:

Debit: Share Capital xx
Debit: Additional Paid-In Capital xx
Credit: Treasury Shares xx

Cancellation decreases issued share capital but does not affect total equity beyond the repurchase amount already recognized.

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How share buybacks affect earnings per share

Under IAS 33 (Earnings per Share) and ASC 260 (Earnings per Share), buybacks reduce the weighted average number of shares outstanding, thereby increasing Basic EPS and Diluted EPS, assuming net income remains constant.

Example:Net income = 3,000,000Shares outstanding before repurchase = 1,000,000Buyback = 100,000 shares held for 6 months

Weighted average shares = 950,000EPS before buyback: 3.00EPS after buyback: 3,000,000 / 950,000 = 3.16

EPS improvement reflects fewer outstanding shares, but not necessarily higher profitability. Analysts often adjust for buybacks to isolate true performance changes.

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Disclosure and presentation requirements

Both IFRS and GAAP require clear presentation of treasury shares within equity and detailed note disclosures.

Disclosures include:

Number of shares repurchased, reissued, or cancelled during the period.
Total cost of treasury shares held.
Purpose of buyback (e.g., capital optimization, employee plans).
EPS impact.
Legal or contractual restrictions on reissuance.

Example disclosure table:

Transaction	Shares	Amount (USD)	Presentation
Buyback	100,000	2,000,000	Deducted from equity
Reissue (Employee Plan)	40,000	800,000	APIC adjustment
Cancelled	60,000	1,200,000	Share capital reduction

Total Treasury Shares at Year-End: 40,000 shares valued at 800,000.

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Comparative framework between IFRS and US GAAP

Aspect	IFRS (IAS 32, IAS 33)	US GAAP (ASC 505-30, ASC 260)
Recognition	Deduction from equity at cost	Same principle
Measurement	Cost basis	Cost or par value method
Income Statement Impact	None	None
Reissuance Gains/Losses	Adjust equity only	Adjust APIC or retained earnings
EPS Treatment	Reduce weighted average shares	Same
Disclosure Detail	Required under IAS 1 and IAS 33	Required under ASC 505-30-50

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Journal entries summary

1) Share buyback at cost:

Debit: Treasury Shares xx
Credit: Cash xx

2) Reissuance above cost:

Debit: Cash xx
Credit: Treasury Shares xx
Credit: APIC – Treasury xx

3) Reissuance below cost:

Debit: Cash xx
Debit: APIC – Treasury xx
Credit: Treasury Shares xx

4) Cancellation:

Debit: Share Capital xx
Debit: APIC xx
Credit: Treasury Shares xx

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Impact on financial performance and ratios

Share repurchases influence several key metrics:

EPS: increases due to reduced shares outstanding.
ROE: typically rises as equity decreases while profit remains constant.
Leverage ratios: worsen as cash is used for buybacks instead of reducing liabilities.
Book value per share: may increase or decrease depending on repurchase price relative to book value.

While buybacks can signal confidence or optimize capital, excessive repurchases may erode liquidity and long-term investment capacity.

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Operational considerations

To apply IAS 32 and ASC 505 correctly, companies should:

Establish formal authorization for repurchase programs.
Ensure compliance with legal limits and distributable profits.
Track treasury shares separately for employee compensation plans.
Monitor EPS volatility following repurchases.
Maintain detailed reconciliations of issued, outstanding, and treasury shares for disclosure accuracy.

Accurate presentation of treasury shares under IFRS and US GAAP ensures transparency in capital management and helps investors distinguish between operational performance and financial engineering effects.

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DATA STUDIOS

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