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Treasury Stocks: Understanding a Company's Own Shares
What are Treasury Stocks?
Treasury stocks, also known as treasury shares or reacquired stock, refer to shares that a company purchases back from its shareholders and holds in its own treasury.
Characteristics of Treasury Stocks
Treasury stocks are previously issued outstanding shares that have been repurchased. Companies can use treasury stocks for various purposes, such as employee compensation, dividends, or to reduce the number of outstanding shares.
Impact of Treasury Stocks
The repurchase of shares can affect a company's financial position and stock price. Treasury stocks can reduce the number of outstanding shares, potentially increasing earnings per share. However, companies must consider the cost of purchasing and holding treasury stocks as it can impact their financial flexibility.
Types of Treasury Stocks
There are two main types of treasury stocks:
- Purchased Treasury Shares: Shares bought back from shareholders through open market purchases or tender offers.
- Donated Treasury Shares: Shares received as donations or gifts.
Accounting for Treasury Stocks
Treasury stocks are accounted for as a negative component of shareholders' equity. The cost of the repurchased shares is recorded as a reduction in equity, while the retained earnings are reduced by the difference between the purchase price and the par value of the shares.
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