LEMBAGA PIAWAIAN PERAKAUNAN MALAYSIA
MALAYSIAN ACCOUNTING STANDARDS BOARD
MASB TECHNICAL RELEASE 1 (revised)
Share Buybacks - Accounting and Disclosure
(Issued April 1999)
The accounting principles, which have been set in bold type, should be read in the context of the Foreword to Financial Reporting Standards and Other Technical Pronouncements. Financial Reporting Standards and Other Technical Pronouncements are not intended to apply to immaterial items.
The Malaysian Accounting Standards Board (herein called the Board) has approved the issuance of this revised Technical Release TR1. The Technical Release presents the Board's view on the appropriate accounting treatments and disclosures on share buybacks within the law and the principles established in generally accepted accounting standards. It also has due regard to international developments. Accordingly, the Board expects reporting public listed companies to comply with the requirements of this revised Technical Release.
The original Technical Release TR1, Share Buybacks and Financial Assistance, was drafted based on the original Section 67A of the Companies Act 1965. Section 67A was subsequently amended to permit shares repurchased to be held as treasury shares. However, the amendment removes the provisions relating to the giving of financial assistance. Additionally, the amendment allows for the use of the share premium account to provide for the consideration of shares repurchased. Accordingly, this revised TR1 is drafted to reflect the amendment to Section 67A of the Act. It supersedes the original Technical Release TR1, Share Buybacks and Financial Assistance, issued on 1 July 1998.
This revised Technical Release sets out the accounting methods for share buybacks by public listed companies. It prescribes the use of either the treasury stock method, the share retirement method, or a combination of both methods. If a public listed company uses the treasury stock method, this revised Technical Release requires that treasury shares should be measured and carried at cost. This revised Technical Release also deals with the disclosures for share buybacks by public listed companies. In the circumstance when share buybacks change an investor's interests in a listed subsidiary company or a listed associated company, this revised Technical Release prescribes it as an acquisition of additional equity interest.
In prescribing the accounting methods for share buybacks, this revised Technical Release considers the statutory provisions of Section 67A (as amended) of the Companies Act 1965, the Bursa Malaysia Berhad's revised Guidelines Governing Purchase of Own Shares by Listed Companies, and generally accepted accounting principles on equity instruments.
This revised Technical Release applies only to Malaysian public listed companies for the purpose of share buybacks which are transacted in accordance with Section 67A (as amended) of the Companies Act 1965.
The Conceptual Issues
A conceptual recognition issue concerns whether shares repurchased by the issuing company can be considered as an asset, such as an investment. In accounting literature, an asset is defined as "a resource controlled by an enterprise as a result of past transactions or events and from which future economic benefits are expected to flow to the enterprise". Shares repurchased do not satisfy the recognition criteria of an asset. Thus, when a company repurchases its own shares, the shares so repurchased are no longer outstanding (i.e., no longer in issue) insofar as the company is concerned. Accordingly, there should be a derecognition of the amount of the company's issued capital instrument. The accounting issue is not whether or not statutes require those shares to be cancelled, but is on how the repurchased shares should be eliminated or derecognised from shareholders' equity. Even if the law does not require those shares to be cancelled, the shares repurchased cannot be treated as an asset (for example, as an investment) because a company cannot possibly have a claim on itself or even own part of itself. The shares repurchased must either be retired, formally, by a cancellation, or if a country's laws permit, constructively, by a set-off against the equity of the company.
Another conceptual recognition issue concerns whether share repurchases should be considered as income transactions or equity transactions. In accounting literature, income is defined as "an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants". Similarly, expense is defined as "a decrease in economic benefits during the accounting period in the form of outflows or depletion of assets or incurrence of liabilities that result in decreases in equity, other than those relating to contributions to equity participants". Share repurchases, like share issues, are transactions between a company and its shareholders, and are therefore contributions to or from equity participants. Accordingly, such transactions are not income or expense in nature, but are equity transactions that should be dealt with directly in shareholders' equity. Thus, when shares are repurchased, any premium or discount arising on the repurchase should be shown as a movement in reserves, rather than recognised as an expense or income in the profit and loss account. Similarly, when repurchased shares are reissued subsequently, any difference between the resale price and the carrying amount of the repurchased shares should be shown as a movement in reserves, rather than recognised as a gain or loss on resale of repurchased shares.