Some companies may implement stock-buyback programs to repurchase outstanding common shares and keep them as treasury stock for later reissuance. The reissuance, or sale, of treasury stock affects outstanding common stock as to the number of shares and the value of the stock equity. Depending on the selling price of treasury stock as compared to its prior repurchase cost, the sale of treasury stock may increase or decrease common stock’s additional-paid-in capital and sometimes further decrease retained earnings.
When a company buys back certain amount of common stock, the repurchase reduces the number of common shares outstanding. But repurchased shares are still considered part of the total shares issued if the company keeps them in treasury stock as opposed to retiring them. Companies can sell shares out of treasury stock back to the public again without seeking additional approval. Thus, the sale of treasury stock doesn’t change the total number of common shares issued but merely increases the number of common shares outstanding.
Sale At Cost
The cost, or the stock price, at which a company has bought back shares as treasury stock is the basis for determining whether a later resale of the same treasury stock will increase or decrease the additional-paid-in capital for the outstanding common stock. However, the sale of treasury stock may not affect the amount of additional-paid-in capital if the selling price equals the original purchase cost of the treasury stock. Existing treasury stock reduces total shareholders’ equity, and thus the sale of the treasury stock at original cost increases shareholders equity back to its original level.
Sale Above Cost
When the selling price of the treasury stock is higher than its original repurchase cost, the additional sales proceeds increase the additional-paid-in capital for the outstanding common stock. First, companies add back the cost portion of the treasury stock to shareholders’ equity, then they increase the amount of additional-paid-in capital by the amount of the additional sales proceeds. The increase in additional-paid-in capital further increases the total amount of shareholders’ equity.
Sale Below Cost
When the selling price of the treasury stock is lower than its original repurchase cost, the deficit in sales proceeds decreases the additional-paid-in capital for the outstanding common stock. First, companies add back the cost portion of the treasury stock to shareholders’ equity. Next, because the total cost is not fully recovered, companies must reduce the amount of additional-paid-in capital by the amount of the shortfall. If additional-paid-in capital has been exhausted, any remaining shortfall further reduces retained earnings.