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November 2010

GAPs in GAAP – Accounting of Treasury Shares

By Dolphy D’Souza | Chartered Accountant
Reading Time 3 mins

Accounting standards

Companies may have invested
in their own shares for a number of reasons, for example, treasury shares are
created at the time of mergers and acquisitions of a group company or any other
company. When a company sells its own shares, the shares are transferred from
one set of owners to another set of owners. Under International Financial
Reporting Standards (IFRS), no gain or loss is recognised on the acquisition or
sale of treasury shares, because they are considered as fresh capital issuances
leading to an increase or decrease in share capital rather than an income or an
expense. The acquisition or subsequent resale by an entity of its own equity
instruments represents a transfer between those holders of equity instruments
who have given up their equity interest and those who continue to hold an equity
instrument and hence no gain or loss is recognised.

IAS 32, Financial
: Presentation sets out the requirements very clearly in paragraphs 33 and 34.

33 If an entity
reacquires its own equity instruments, those instruments (‘treasury shares’)
shall be deducted from equity. No gain or loss shall be recognised 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.

34 The amount of
treasury shares held is disclosed separately either in the statement of
financial position or in the notes, in accordance with IAS 1 Presentation
of Financial Statements
. An entity provides disclosure in accordance
with IAS 24 Related Party Disclosures if the entity reacquires its
own equity instruments from related parties.

However, under current
Indian accounting standards, in the absence of any specific guidance, there are
disparate practices, though it is common to find companies recognising profit on
sale of treasury shares. This is acceptable under current Indian accounting
standards. However, as already mentioned, the same would not be acceptable under
IFRS. This would provide companies with an accounting arbitrage prior to their
IFRS transition date. For example, a company may sell the treasury shares prior
to the IFRS transition date and thereby recognise gains under Indian GAAP. If
the company sells these shares after adoption of IFRS, it cannot recognise any
gain/loss. As IFRS is being adopted in phases, the accounting arbitrage will
continue for entities that adopt IFRS in later phases or are not required to
apply IFRS.

It may be noted that in
accordance with the directives of SEBI, the stock exchange listing agreements
were amended to require all listed companies to comply with accounting standards
in the case of any merger, amalgamation or restructuring u/s.391 and u/s.394,
and that this would be evidenced by a certificate from the auditors of the
company. Consequently, this had the effect of pre-empting the rights of the High
Court in determining the accounting treatment u/s.391 and u/s. 394. If such a
scheme requires gain/loss to be recognised on sale of treasury shares, then the
auditors will not be able to qualify the certificate with regards to compliance
with accounting standards.

The absence of a standard in India with
regards to accounting of treasury shares is a gap that will be filled
when IFRS kicks in.

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