What are Treasury Shares?
Treasury shares or reacquired shares are those which a company had issued and subsequently reacquired from shareholders. Once acquired, these shares remain in possession of the company and can be sold in the future, or the company might retire, and these would be out of market circulation in that case.
There are three ways for a business to repurchase treasury shares.
- Tender offer
- Open market or direct repurchase
- Dutch auction
Now the question is why do companies reacquire these shares? Well, of course, there are various reasons that we would discuss below.
Reasons why companies purchase treasury shares
- Companies repurchase shares so that they could increase their controlling power in decision-making.
- Companies also reacquire for the issuance of shares to officers and employees under bonus and stock compensation plans.
- To have more shares available for acquisitions of other businesses.
- When the price of shares is undervalued in case of a downtrend market, then companies buy back these shares because it will boost the share price and earnings per share.
- When treasury shares are retired after purchase, they are removed from the circulating supply. As a result, the share price of existing shares rises, and shareholders benefit from increased ownership and dividends.
Accounting for Treasury shares
Treasury shares are one of the various types of equity accounts reported on the balance sheet statement as a contra-equity account under the stockholders’ equity section.
Companies usually use the cost method to account for treasury shares. The company debits Treasury Shares for the price paid to reacquire the shares under the cost method. In the case of disposal of treasury shares, it credits the same amount to Treasury Shares as it paid to repurchase the shares.
Limitations of treasury shares
Following are the limitations of treasury shares.
- Treasury shareholders are not entitled to receive dividends.
- They have no voting rights.
- They do not exercise preliminary rights.
- They even have no right to receive their net assets in case of liquidation of the company.