FASB Technical Bulletin No. 85-6 FTB 85-6 Status Page Accounting for a Purchase of Treasury Shares at a Price Significantly in Excess of the Current Market Price of the Shares and the Income Statement Classification of Costs Incurred in Defending against a Takeover Attempt December 1985 Financial Accounting Standards Board of the Financial Accounting Foundation 401 MERRITT 7, P.O. BOX 5116, NORWALK, CONNECTICUT 06856-5116
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FTB 85-6: Accounting for a Purchase of Treasury Shares at a Price Significantly in Excess of the Current Market Price of the Shares and the Income Statement Classification of Costs Incurred in Defending against a Takeover Attempt References: FASB Concepts Statement No. 6, Elements of Financial Statements, paragraph 28 APB Opinion No. 30, Reporting the Results of Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, paragraph 20 APB Opinion No. 26, Early Extinguishment of Debt APB Opinion No. 25, Accounting for Stock Issued to Employees, paragraph 11(g) APB Opinion No. 21, Interest on Receivables and Payables, paragraph 7 APB Opinion No. 16, Business Combinations, paragraph 72 APB Opinion No. 6, Status of Accounting Research Bulletins, paragraph 12 ARB No. 43, Chapter 1B, "Profits or Losses on Treasury Stock" Question 1 1. How should a company account for a purchase of treasury shares at a stated price significantly in excess of the current market price of the shares? Response 2. An agreement to purchase shares from a shareholder may also involve the receipt or payment of consideration in exchange for stated or unstated rights or privileges that should be identified to allocate properly the purchase price. 3. A purchase of shares at a price significantly in excess of the current market price creates a presumption that the purchase price includes amounts attributable to items other than the shares purchased. For example, the selling shareholder may agree to abandon certain acquisition plans, forego other planned transactions, settle litigation, settle employment contracts, or restrict Page 3
voluntarily the ability to purchase shares of the company or its affiliates within a stated time period. If the purchase of treasury shares includes the receipt of stated or unstated rights, privileges, or agreements in addition to the capital stock, only the amount representing the fair value of the treasury shares at the date the major terms of the agreement to purchase the shares are reached should be accounted for as the cost of the shares acquired. The price paid in excess of the amount accounted for as the cost of treasury shares should be attributed to the other elements of the transaction and accounted for according to their substance. If the fair value of those other elements of the transaction is more clearly evident, for example, because a company's shares are not publicly traded, that amount should be assigned to those elements and the difference recorded as the cost of treasury shares. If no stated or unstated consideration in addition to the capital stock can be identified, the entire purchase price should be accounted for as the cost of treasury shares. The allocation of amounts paid and the accounting treatment for such amounts should be disclosed. Question 2 4. Should amounts paid by an enterprise to a shareholder or former shareholder attributed to an agreement precluding the shareholder or former shareholder from purchasing additional shares be capitalized as assets and amortized over the period of the agreement? Response 5. No. Payments by an enterprise to a shareholder or former shareholder attributed, for example, to a "standstill" agreement, or any agreement in which a shareholder or former shareholder agrees not to purchase additional shares, should be expensed as incurred. Such payments do not give rise to assets of the enterprise as defined in Concepts Statement 6. Question 3 6. Should the costs incurred by a company to defend itself from a takeover attempt or the cost attributed to a "standstill" agreement be classified as extraordinary items? Response 7. No. Neither the costs incurred by a company to defend itself from a takeover attempt nor the costs incurred as part of a "standstill" agreement meet the criteria for extraordinary classification as discussed in paragraph 20 of Opinion 30. The event that gave rise to those costs a takeover attempt cannot be considered to be both unusual and infrequent as those terms are used in Opinion 30. Page 4
Effective Date and Transition 8. The provisions of this Technical Bulletin are effective for transactions after December 31, 1985. Earlier application to transactions occurring in periods for which financial statements have not been issued is encouraged. Appendix: BACKGROUND INFORMATION 9. Most transactions by an enterprise in shares of its own stock are solely capital transactions, that is, the transactions involve only the transfer of ownership of the enterprise's stock or rights associated with ownership of the stock. Those transactions do not result in recognition of income or expense by the enterprise. The accounting for transactions involving treasury stock purchases or reissuances is well established, as described in paragraph 12 of Opinion 6, which expanded on guidance in Chapter 1B of ARB 43. That guidance was first provided in 1938 by the AICPA Committee on Accounting Procedure, the predecessor of the Accounting Principles Board. 10. In some cases, however, a transaction involving shares of an enterprise's own stock may involve the receipt or payment of consideration in exchange for rights or privileges that may require recognition of income or expense by the enterprise. The Board and its predecessor, the Accounting Principles Board, have addressed several transactions of this type and concluded that recognition of income or expense is required. For example, paragraph 11(g) of Opinion 25 requires that compensation expense be recognized when an enterprise settles an earlier grant of stock to an employee by repurchasing the shares granted to the employee if the shares are reacquired shortly after issuance. Opinion 26 (as amended by FASB Statements No. 76, Extinguishment of Debt, and No. 84, Induced Conversions of Convertible Debt) requires recognition of gain or loss when debt of an enterprise is extinguished by the issuance of shares of the enterprise and the fair value of shares issued differs from the carrying amount of the debt. 11. Paragraph 7 of Opinion 21 describes the need to give accounting recognition to unstated rights or privileges that affect the interest rate on a note. Although Opinion 21 does not address transactions involving equity instruments, the need to give accounting recognition to unstated rights or privileges is a well-established concept in accounting. Frequently, transactions involve payment of an amount that must be allocated among assets acquired, liabilities settled, and expenses paid, because the prices paid for the individual assets, liabilities, and expenses are unstated. For example, it is often necessary to allocate the cost of real estate between land and buildings acquired in a single transaction. Page 5
12. The need to allocate cost among items acquired as a group is a common occurrence in accounting. Paragraph 72 of Opinion 16 states that "the same accounting principles apply to determining the cost of assets acquired individually, those acquired in a group, and those acquired in a business combination." 13. In an exchange transaction of other assets for marketable securities, the fair value of the securities typically is more clearly evident from the market prices of the same securities being traded in the market than is the fair value of other assets acquired or given up. In those transactions, the fair value of the securities is generally the best indication of the fair value of the other assets acquired or sold. A similar relationship holds true in a treasury stock transaction involving the receipt of consideration in addition to the capital stock; the quoted market price of the securities being traded in the market will frequently be the best indication of the fair value of the shares acquired. 14. An enterprise offering to repurchase shares only from a specific shareholder (or group of shareholders) suggests that the repurchase may involve more than the purchase of treasury shares. Also, when an enterprise repurchases shares at a price that is different from the price obtainable in transactions in the open market or transactions in which the identity of the selling shareholder is not important, some portion of the amount being paid presumably represents a payment for stated or unstated rights or privileges that should be given separate accounting recognition. 15. Transactions do arise, however, in which an acquisition of an enterprise's stock may take place at prices different from routine transactions in the open market. For example, to obtain the desired number of shares in a tender offer to all or most shareholders, the offer may need to be at a price in excess of the current market price. In addition, a block of shares representing a controlling interest will generally trade at a price in excess of market, and a large block of shares may trade at a price above or below the current market price depending on whether the buyer or seller initiates the transaction. A company's acquisition of its shares in those circumstances is solely a treasury stock transaction properly accounted for at the purchase price of the treasury shares. Therefore, in the absence of the receipt of stated or unstated consideration in addition to the capital stock, the entire purchase price should be accounted for as the cost of treasury shares. 16. The allocation of amounts described in paragraph 3 of this Technical Bulletin requires significant judgment and consideration of many factors that can significantly affect amounts recognized in the financial statements. Disclosure of the allocation of amounts and the accounting treatment for such amounts is necessary to enable the user of the financial statements to understand the nature of significant transactions that may affect, in part, the capital of the enterprise. Page 6
17. Paragraph 5 of this Technical Bulletin states that payments by an enterprise to a shareholder or former shareholder attributed to an agreement in which a shareholder or former shareholder agrees not to take specified actions for a specific period of time should be expensed as incurred. Payments to shareholders generally do not give rise to assets of an enterprise unless they meet the definition of an asset in Concepts Statement 6. According to paragraph 28 of Concepts Statement 6, the primary characteristic of an asset is the scarce capacity to provide services or benefits to the entities that use them: The common characteristic possessed by all assets (economic resources) is "service potential" or "future economic benefit," the scarce capacity to provide services or benefits to the entities that use them. In a business enterprise, that service potential or future economic benefit eventually results in net cash inflows to the enterprise. The Financial Accounting Standards Board has authorized its staff to prepare FASB Technical Bulletins to provide guidance on certain financial accounting and reporting problems on a timely basis, pursuant to the procedures described in FASB Technical Bulletin No. 79-1 (Revised), Purpose and Scope of FASB Technical Bulletins and Procedures for Issuance. The provisions of Technical Bulletins need not be applied to immaterial items. Page 7