Reacquired shares, and the two frameworks’ equity statements

Buying back shares

A company sometimes buys its own shares back from the market — to return surplus cash without committing to a dividend, to offset dilution from employee share plans, or to support the price. Whatever the reason, the effect is the same: cash leaves the company and equity falls by the amount paid. The reacquired shares are either cancelled or, where the jurisdiction allows it, held as treasury shares; either way they are no longer outstanding, which is the wedge between issued and outstanding from lesson 4.3.

IFRS gives no detailed guidance on the order of the debits. ASPE does: the cost is applied first to share capital (the average issue price of the shares bought), then to any contributed surplus created by earlier buy-backs of the same class, and any remainder to retained earnings. At this level, know the direction — a buy-back reduces equity and the outstanding count — and that a company never records a gain or loss on dealing in its own shares.

Worked example — Prairie Sky’s statement of changes in equity

Prairie Sky reports under IFRS. Its year in equity, in one statement:

                     Common   Preferred  Retained   AOCI     Total
                     shares   shares     earnings
Opening balance    1,665,000   500,000     580,000    5,000  2,750,000
Shares issued        210,000         —           —        —    210,000
Net income                 —         —     580,000        —    580,000
Dividends declared         —         —    (100,000)       —   (100,000)
Other comprehensive income —         —           —   10,000     10,000
Closing balance    1,875,000   500,000   1,060,000   15,000  3,450,000

Every equity account has a column and every movement has a row: this is the statement of changes in equity that IFRS (IAS 1) requires. The AOCI column — accumulated other comprehensive income — collects gains and losses that IFRS routes around net income (an unrealised gain on certain investments, a revaluation surplus). They land in equity through other comprehensive income, never through the income statement.

What an ASPE company shows instead

A private company reporting under ASPE presents a statement of retained earnings: opening retained earnings, plus net income, less dividends, closing retained earnings — one column. Movements in share capital appear in the notes, not in a statement. And there is no AOCI under ASPE, because ASPE has no concept of other comprehensive income at all; the items IFRS routes through OCI either go through net income or are not recognised.

Retained earnings, opening         580,000
Add: net income                    580,000
Less: dividends declared          (100,000)
Retained earnings, closing       1,060,000

The two statements agree on retained earnings. They differ on scope (all equity vs one account) and on the existence of AOCI — which makes “which framework produced this statement?” a one-glance question: a column headed AOCI, or a row for share issues, means IFRS.