Buyback of shares accounting treatment pdf

Buyback of shares accounting treatment pdf

Posted: littleMonster On: 04.06.2017
buyback of shares accounting treatment pdf

The below mentioned article provides a study note on the Buy-back of Shares: Conditions for Buy-back of Shares 2. Restrictions on Buy-back of Shares 3. Contents of Notice of Meeting 4. Declaration of Solvency 8. Method of Fixation of Price 9. Deposit in an Escrow Account Important Things After However, as per the Companies Amendment Act, the Board of Directors is now empowered to buy-back up to 10 per cent of the total paid-up capital and free reserves of the company without approval of shareholders in the general meeting.

Buy back of shares - introduction and accounting

Further, the buy-back of equity shares in any financial year cannot exceed 25 per cent of its total paid-up equity capital in that financial year. However, the Central Government may prescribe a higher ratio of the debt than that specified in this clause for a class or classes of companies.

The buy-back of shares which are not listed on any stock exchange has to be in accordance with the guidelines as may be specified. The notice of the meeting at which special resolution is proposed to be passed for buy-back has to be accompanied by an explanatory statement stating: In any case, the buy-back has to be completed within twelve months from the date of passing the special resolution.

No buy-back of shares can be made out of the proceeds of an earlier issue of the same kind of shares. Before a buy-back, a listed company has to file with the Registrar of companies and the SEBI, a declaration of solvency stating that the Board of Directors has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that the Company is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the Board.

buy back of share

The declaration has to be signed by at least two directors of the company, one of them being managing director, if any. The price at which the shares are bought-back may be decided by either of the following methods: The company may fix a price for buy-back of shares and invite its shareholders to offer within a specified period of time shares at the fixed price for buy-back.

Accounting Entries for Buyback of Shares

In case of oversubscription, all applications are accepted on a pro-rata basis. Alternatively, the company may announce a range of price called a band and invite its shareholders to submit tenders within the specified period of time offering shares at prices within the announced band The company will choose the lowest offered price at which it is able to repurchase the requisite number of shares.

Accounting Entries for Buyback of Shares

Different shareholders may have quoted different prices but all the shareholders whose shares are bought-back get the same price. The SEBI requires the company going in for a buy-back of shares to deposit in an escrow account a specified percentage of total consideration payable for the buy-back Escrow account means an account in which money is held until a specified duty has been performed; in the present case it means till the consideration for buy-back of shares has been paid to the shareholders.

Buy-back of Shares (With Illustration) | Accounting

After the buy-back, the company is required to extinguish and physically destroy the shares so bought-back within 7 days of the last date of completion of buy- back The company is not allowed to make further issue of the same kind of shares as bought-back within a period of 24 months of the buy-back. The Companies Amendment Act, has reduced this period of 24 months to 6 months.

But the company may issue bonus shares. It may also discharge its subsisting obligations such as conversion of preference shares or debentures into equity shares.

The main advantage of buy-back of shares is that it facilitates capital restructuring of the company. By getting rid of the capital not required by it, the company is able to step-up its earnings per share. The buy-back can also be used by the company to thwart or frustrate the hostile take -over of the company by undesirable persons. Free reserves mean those reserves which as per the latest audited balance sheet of the company, are free for distribution as dividend and will include Securities Premium Account.

The company uses Rs 8,50, of its balance in Securities Premium Account apart from its adequate balance in General Reserve Account to fulfill the legal requirements regarding buy-back.

buyback of shares accounting treatment pdf

Pass journal entries for all the transactions involved in the buy-back. Terms of Service 7. Report a Violation

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