We all got to hear by now that some major companies in India including Tata Consultancy Services (TCS) are planning to buy back its shares in order to improve efficiencies into its earning per share. We will not discuss about the reasons and shortcoming of Buyback schemes which are normally being done by any Company, however we will discuss in brief about an accounting perspective (related provisions in Ind-As) for such buy back of shares comparing to the new accounting standards as applicable in India.
As per section 68 of Companies act 2013 which talks about the "Power of Company to purchase its own securities" Para 7 - "Where a company buys back its own shares or other specified securities, it shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of buy-back.
Under the current practices in India on such buy backs, a company needs to cancel/ extinguish its shares immediately. Hence there is no concept of Treasury shares (Investment in its own shares) in India and an entity CANNOT hold its own shares. All such buy back of shares will be deducted from the respective accounts (share premium account etc) of Balances sheet as per the provisions of Companies act and all Expenses related to such buy back will be debited to Profit or loss for the period in which such buy back has been done. Reader can refer below links which highlighted some recent buyback treatment under current accounting treatments and respective disclosures-
Motilal Oswal:
http://www.motilaloswalgroup.com/Downloads/IR/585656674MOFSL-AR-2015-full.pdf
Reliance India:
http://www.ril.com/getattachment/14066af0-f5b6-46ed-9370-7386fa924b12/AnnualReport_2012-13.aspx
Now,
Let’s understand what are the relevant provisions in new accounting standard i.e. Ind-AS/ IFRS which talks about such buy backs and its potential impact upon the accounting, basically one can navigate these new standards to know about where to refer while applying buy back accounting-
Ind-As 32 - "Financial Instruments- Presentation" para 33 - If an entity reacquires its own equity instruments, those instruments ('treasury shares') shall be deducted from equity. No gain or loss shall be recognized in profit or loss on the purchase, sale, issue or cancellation of an entity’s own equity instruments. Such treasury shares may be acquired and held by the entity or by other members of the consolidated group. Consideration paid or received shall be recognised directly in equity.
Para AG36 - An entity’s own equity instruments are not recognized as a financial asset regardless of the reason for which they are reacquired. Paragraph 33 requires an entity that reacquires its own equity instruments to deduct those equity instruments from equity. However, when an entity holds its own equity on behalf of others, eg a financial institution holding its own equity on behalf of a client, there is an agency relationship and as a result those holdings are not included in the entity’s balance sheet.
Reader of this article will appreciate that there is a specific concept in Ind-As/ IFRS on Treasure shares where an entity buys its own shares and its accounting treatment accordingly unlike in current accounting where there is no specific accounting guidance available on such buy back of shares.
Below are some pointers which make reader easier to note some major changes/ objective of the standard and can have a sense of major practical issues/ matters-
1. There are many countries around the world where an entity can buy and invest in its own shares and can held for trading purposes as well, however in Indian perspective all such shares need to cancel compulsory as soon as these are being bought back, Now one can visualize that there is a guidance available for such sale and purchase and trading of own shares hence if regulators allow to trade within own shares then its accounting reference will remain same as mentioned above.
2. There is very specific mention in the standard that all amount which is being received out of such buy back will be directly debited to the equity and no gains and loss will be booked in profit and loss as the standard explain that these transactions are within shareholders and there is no relevancy of these transactions with normal operating business of the entity.
3. Any kind of expenses related to this buy back will be directly charged to equity unlike in current accounting where such expenses are being debited to profit or loss account.
4. Standard is very clear about the treatment of such activities which are being done within shareholders and hence all amounts transacted will be directly debited to equity and no gain or loss will be routed through Profit or loss account.
5. One can argue that since the amount of shares are being bought from the market and if these are like other investment for an entity then why can we show them as financial asset (financial assets is contractual right to receive cash or other financial assets). Standard specifically says (refer AG 36 above) that such acquired shares will not be recognized as financial assets and will be deducted from Share capital under any circumstances unless some agency relation exists.
6. There would be some situations where a subsidiary company holds some shares in its parent company , then under separate financial statement of subsidiary company these share will be treated as any other financial statement however under consolidated FS it will be treated as Treasury stock (for Group) and hence above provisions will be applicable.
Essentially the overall difference will be to treat expenses related to such buy back and Treasury shares related accounting provisions which talks about not only to cancel these shares but to sale/ purchase and realize some gain as well over own shares. Hence as and when it is allowed to trade in own shares then one has to look at these provisions only for an accounting perspective.
The above discussion is to provide an overall idea/ an approach towards the provisions and accounting treatment applicable while making such buy-back under new accounting standards.
A reader will appreciate about the main objective of the standard and an approach which one can follow while keeping in mind the basis of origin of such requirements. There could possibly be some specific situations or circumstances where the interpretation of any standard will be different as we should always keep in mind that IND-AS is principle based standards and lot more areas need management judgment in line with the standards relevant interpretation and best practices.
One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Readers are requested not to take this article as any kind of advice (it is not exhaustive in nature) and should evaluate all relevant factors of each individual cases separately.
The author can also be reached at anujagarwalsin@gmail.com
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