How Treasury Stock Is Accounted for and Presented on the Balance Sheet

Graziano Stefanelli
Oct 13
3 min read

Treasury stock represents a company’s own shares that it has repurchased and not retired. These shares reduce total shareholders’ equity because they represent previously issued capital that is no longer outstanding. Under IFRS (IAS 32) and US GAAP (ASC 505-30), treasury shares are recorded at cost and shown as a deduction from equity, not as an asset. Understanding treasury stock accounting helps clarify how share repurchases affect capital structure, earnings per share, and shareholder returns.

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How treasury stock arises

Companies repurchase their own shares for various strategic reasons:

To return capital to shareholders.
To support share prices or offset dilution from stock-based compensation.
To prepare for mergers, acquisitions, or employee stock plans.
To improve financial ratios such as earnings per share (EPS).

Example:A company buys back 50,000 of its own shares at 20 each for a total of 1,000,000. The repurchased shares are held in treasury rather than cancelled. These shares reduce total equity but remain legally issued until retired.

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Presentation on the balance sheet

Treasury stock is presented as a contra-equity account, meaning it reduces total shareholders’ equity. It is never classified as an asset because a company cannot own itself.

Example:

Share Capital: 3,000,000
Additional Paid-in Capital: 500,000
Retained Earnings: 2,200,000
Less: Treasury Stock (at cost): (1,000,000)
Total Shareholders’ Equity: 4,700,000

In the equity section, treasury stock typically appears immediately below retained earnings, shown as a negative balance.

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Journal entries for treasury stock transactions

When shares are repurchased:

Debit: Treasury Stock 1,000,000
Credit: Cash 1,000,000

When shares are reissued above cost:

Debit: Cash 1,200,000
Credit: Treasury Stock 1,000,000
Credit: Additional Paid-in Capital – Treasury Stock 200,000

When shares are reissued below cost:

Debit: Cash 800,000
Debit: Additional Paid-in Capital – Treasury Stock 200,000
Credit: Treasury Stock 1,000,000

If there is no balance in APIC–Treasury, the difference is charged directly to Retained Earnings.

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Standards under IFRS and US GAAP

IFRS (IAS 32 – Financial Instruments: Presentation): Treasury shares are deducted directly from equity at cost. No gain or loss is recognized in profit or loss on purchase, sale, or cancellation of treasury shares. Any difference between cost and reissue proceeds is recognized in equity.
US GAAP (ASC 505-30 – Treasury Stock): Allows two methods:
- Cost Method: Treasury shares recorded at repurchase cost (most common).
- Par Value Method: Treasury shares recorded at par, adjusting APIC and Retained Earnings for differences.
  
  Like IFRS, no income statement effect is recognized.

Both frameworks stress that treasury transactions are equity movements, not operating gains or losses.

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Impact on financial performance and ratios

Repurchasing shares affects key financial metrics:

Earnings per Share (EPS): Increases because fewer shares remain outstanding.
Return on Equity (ROE): Often rises since equity decreases while net income remains constant.
Debt-to-Equity Ratio: Increases if buybacks are financed with debt.

Example:If a company earns 1,000,000 with 1,000,000 shares outstanding (EPS = 1.00), and buys back 100,000 shares, new EPS rises to 1.11 assuming constant income. However, equity also drops due to treasury stock, affecting solvency ratios.

These effects are financial rather than operational, so analysts adjust to isolate the impact of repurchases from core performance.

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Disclosures required for treasury stock

Companies must disclose:

Number and cost of treasury shares held.
Changes in treasury stock during the period (purchases, reissues, cancellations).
The accounting method used (cost or par value).
Any restrictions on reissuance or resale.

Public companies often include detailed reconciliation tables in equity statements to show treasury stock activity and its effect on total equity.

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Operational considerations

Share buybacks are among the most visible capital allocation decisions a company makes. They can enhance shareholder value when executed prudently but may also signal limited growth opportunities if excess cash is not reinvested. From a governance standpoint, repurchase timing and volume influence investor perception and market confidence.

For financial reporting, consistent accounting under IAS 32 or ASC 505 ensures clarity about the reduction in equity and avoids misinterpretation of buybacks as profit-generating activities. Transparent presentation of treasury stock allows users to evaluate management’s capital strategy and its long-term implications for liquidity and ownership structure.

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DATA STUDIOS

.....[datastudios.org]