Accounting for Accelerated Share Repurchase Programs

Accelerated share repurchase (ASR) contracts allow a company to repurchase a large number of treasury stocks quickly. A company seeks help from an investment bank that first borrows these shares from stock lenders and then purchases the same number of shares from the stock markets.

Let us discuss what is an accelerated share repurchase program, how it works, and what is the accounting treatment for it.

Accelerated Share Repurchase Program

An accelerated share repurchase program allows a company to repurchase a large number of shares at an average market share price over a fixed period.

An ASR contract is between an issuer company and an investment bank. The advantage for the issuing company is to purchase a large number of shares quickly with a single arrangement. The share price is also an objectively predetermined average market price.

In some cases, the issuer company may offer upfront cash to the investment bank. The investment bank then initiates the transaction by borrowing shares from stock lenders in the market. The cash provided by the issuer company can be used as collateral.

Let us now discuss the accounting treatment for the ASR programs.

Accounting for Accelerated Share Repurchase Program

A company relies on the services of an investment bank to complete the accelerated share repurchase program. That is, the counterparty in this transaction is an investment bank.

The ASR program helps a company purchase a large number of shares quickly at an average market price rather than the current market share price. The average share price is usually considered as a volume-weighted average price over a fixed period.

ASC 505-30-25 guides the accounting treatment of the ASR transactions. At the very basic, it guides on treating the ASR program for two transactions.

  • A treasury stock transaction where the company buys a fixed number of common stocks. The company pays the investment bank the spot share price at the purchase date.
  • Secondly, a forward contract where the company receives or delivers cash or shares at the contract’s maturity date. The value received or delivered is calculated as a difference between the spot price and average share price multiplied by the number of shares repurchased.

If the calculated average share price is less than the spot price at inception, the company receives value (the difference) from the investment bank. Contrarily, when the calculated average share price is higher than the spot price, the company delivers value (the difference) to the investment bank.

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The company will not record any changes to the fair value of the forward contract and the settlement would be recorded in equity.

Accelerated Share Repurchase Terms And Conditions:

A company and the investment bank can agree on different terms and features.

Fixed Dollar Vs Fixed Share Contracts

In an accelerated share repurchase contract for a fixed dollar arrangement, the proceeds calculated will be fixed in dollar terms. The proceeds may vary by the number of shares.

In a fixed share contract, the proceeds calculated will be fixed in terms of number of shares. However, the dollar amount may vary in this type as it is calculated by the average market share price.

Fixed Vs Variable Maturity

In a variable maturity ASR program, the investment bank has the option to determine the maturity date. Usually, investment banks pay a premium to the counterparty for a variable maturity ASR option.

In a fixed maturity ASR program, the contract has a fixed and stated maturity date.

Collared, Uncollared, or Capped Pricing

  • Collared ASR programs offer a cap and a floor that determine the maximum and the minimum share price a company would pay to the investment bank.
  • In a capped ASR, the maximum an entity would pay is predetermined. This way, the company can limit the maximum price it would pay to the investment bank.
  • In an uncollared program, the company would participate in the average market share price over a specified period.

How Does the ASR Program Works?

An accelerated share repurchase program is arranged between an entity and an investment bank. Both parties can determine different features and terms as discussed above. However, the arrangements would have a similar pattern as discussed below.

  • The investment bank borrows shares at the spot rate from stock lenders at the trade date. These lenders are independent of the counterparty in the contract.
  • The issuer company then makes a cash payment to the investment bank and all or a portion of borrowed shares are delivered to the issuer company.
  • The issuer company then agrees to settle the trade at an average market share price in the future. This is the forward contract part of the ASR program.
  • The contract between the investment bank and the issuer company determines different terms such as the repurchase period, a cap, collared, or uncollared arrangement.
  • The investment bank then purchases shares from the open market to return them to stock lenders.
  • At the settlement date, both parties settle the contract as per the terms and conditions of the ASR program.
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Initial Recognition and Measurement

The reporting entity should first determine the nature of the ASR contract. It should establish whether the contract should be accounted for under ASC 480-10-25-14 as a liability.

Under this consideration, an arrangement that requires delivering a varying number of shares is classified as a liability if:

  • The monetary value of the transaction is determined as a fixed monetary amount predetermined at the inception date, or
  • On a variable basis inversely related to the changes in the share price of the reporting entity.

In a basic ASR arrangement, the settlement transaction value changes as the average market share price changes over time. Thus, the consideration does not hold a predetermined fixed amount at the inception date.

Similarly, the ASR arrangements state that the consideration payable at the settlement date is not inversely related to the changes in the share price of the issuer company.

However, in other ASR arrangements, if the entity determines that the transaction should be recorded as a liability or equity, it should be initially recorded under ASC 815 accounting guidelines.

An ASR arrangement with a variable maturity option can be classified under the ASC 480 accounting guidelines. A reporting entity can evaluate such arrangements under the following considerations.

  • The terms of the contract, including the number of shares delivered at the inception of the transaction
  • The reporting entity’s stock price at the trade date
  • The volatility of the reporting entity’s stock price
  • The probability of any cap or floor on the ASR contract being reached

Settlement of the Accelerated Share Repurchase Program

The settlement of the ASR program depends on how the average market share prices moved during the repurchase period.

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Recall that:

  • The reporting entity receives value from the bank if the average market share price is less than the spot share price paid at inception;
  • The reporting entity delivers value to the bank if the average market share price is greater than the spot share price paid at the inception

An ASR contract can be settled in cash or by shares. If the ASR is settled in shares, the cash payment should be recorded as additional paid-in capital. The cash payment is to settle the equity classified contract.

When the ASR is settled in shares, the value shares should be recorded at fair values in the additional paid-in capital section as they settle an equity classified contract as well.

At the settlement date, the investment bank or the reporting entity may owe the settlement amount to the counterparty. These parties can settle the transactions in cash or shares with the following arrangements.

Settled inOwing PartyTreatment
CashBankPayment should be recorded as an increase in the additional paid-in capital
CashReporting EntityPayment should be recorded as a decrease in the additional paid-in capital
SharesBankShares should be recorded in treasury stocks. Shares should be recorded at fair value. The contra entry is to additional paid0in capital
SharesReporting EntityIf the reporting entity issues new shares, the shares should be recorded at fair value with an offsetting entry to additional paid-in capital 

If no party owes a settlement amount, there will be no accounting entry at the settlement date.

Earnings Per Share in ASR Program

An ASR contract is reflected as two separate transactions: the treasury stock transaction and the ASR contract settlement.

The treasury stock transactions result in a reduction of the weighted average shares outstanding. This figure is used to calculate the diluted and basic EPS on the treasury stock transaction date.

The accelerated share repurchase programs offer a choice to the issuing entities to pay or receive the settlement considerations in cash or shares. If the entity opts for shares, it affects the earnings per share of the company.

The reporting entity should include the effect of share settlement in the diluted EPS calculations using the treasury stock method. The company should use the average market share price in the calculations of diluted EPS.

Most ASR arrangements also consider future dividend payment plans. The reporting entity should provide protection to the investment bank if it plans to pay dividends in excess of the planned or historic amount.

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