Accounting for Accelerated Share Repurchase Programs

By Donald P. Pagach and Bruce C. Branson

E-mail Story
Print Story
  AUGUST 2007 - Corporate executives are tasked with capital-allocation decisions that require them to choose from an array of investment options. One option is the return of corporate capital to individual shareholders via dividend payouts, or share repurchases that allow investors to redeploy capital efficiently and with access to a wider choice of investment alternatives. Historically, a dividend payout to shareholders was the predominant course of action.
In the 1970s, dividend payments represented over 90% of the total payout to investors (Michael J. Mauboussin, “Clear Thinking about Share Repurchase,” Legg Mason Capital Management, January 10, 2006,
/Mauboussin_on_Strategy_011006.pdf). Share repurchases grew significantly throughout the next two decades until 1998, when share repurchases eclipsed dividend payouts as the primary means of returning invested capital to shareholders.

Repurchases of shares increased from $77 billion in 1995 to approximately $250 billion in 2005. Fueling this growth has been the recent proliferation of accelerated share repurchase (ASR) programs. These programs afford corporate participants an opportunity to rapidly reduce the number of outstanding shares. A search of the SEC’s EDGAR database found that in the past three years, more than 100 companies announced plans to acquire treasury stock using ASRs. Companies using ASRs include Duke Energy, Hewlett-Packard, Lincoln National Corporation, and DuPont.

Accelerated Share Repurchase Programs

Share repurchase programs have always been complex, involving important financial reporting considerations. Accounting for the programs has been complex as well. Authors Joseph R. Oliver and Katherine S. Moffeit cover several of these issues in their examination of corporate share buyback programs (“Corporate Share Buybacks,” The CPA Journal, August 2000). This article focused on one form of share buybacks, ASRs. These accelerated buybacks are accomplished by having a company purchase shares of its own stock from an investment bank at a set price on a specific date (normally the closing market price on that day). Typically, the investment bank borrows the shares and is in a short position that it will cover through open-market purchases over a period of time. For example, on August 11, 2006, Lincoln National purchased approximately 5.5 million shares of its common stock from Lehman Brothers for an aggregate price of $350 million. Lincoln stated in its August 14, 2006, 8-K filing (
lincoln8k8-11.htm) that it expected Lehman Brothers to have completed all necessary share acquisitions by early in the fourth quarter of 2006. This transaction would result in the company retiring all of the shares purchased on that day. The accounting for ASRs is discussed in FASB’s Emerging Issues Task Force (EITF) Issue 99-7, “Accounting for an Accelerated Share Repurchase Program.” Essentially, the EITF’s position is that ASRs should be accounted for as two separate transactions: a treasury stock acquisition, and a party to a forward contract that allows for settlement in corporate stock.

The forward contract arises due to the required agreement with the investment bank to pay an agreed price for the shares that the investment bank repurchases to cover its short position during the term of the forward contract, which may be anywhere from 30 to 360 days. Usually the contract price is equal to a volume-weighted average share price over the acquisition period, less the initial price paid to the investment bank.

At the end of the contract term, the company and the investment bank settle the forward contract in cash or shares. If the average share price that the investment bank paid for the shares is greater than the initial purchase price that the company paid, the company would have to give the investment bank cash or shares equal to the difference in price multiplied by the number of shares purchased. If the average market price were less than the initial purchase price, the investment bank would be obligated to deliver cash or shares to the company.

Because the forward contract is indexed to the company’s own stock, any changes to the market value of the contract are recorded in the equity section of the balance sheet, not the income statement. This accounting follows the provisions of EITF Issue 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” The fair value of the forward contract at inception is zero, so no accounting for the forward contract is required until settlement, as long as the forward contract continues to meet the requirements for classification as an equity instrument. Under EITF Issue 00-19, any amounts (cash or shares) paid or received upon settlement of the contract are recorded directly in stockholders’ equity.

ASRs differ from traditional share repurchase programs in several subtle, but important, ways. First, the implementation of an ASR program immediately results in a decrease in the number of shares outstanding for a company. Thus, ASRs can result in a more significant change to earnings per share than a traditional open-market share repurchase program. It is important to also recognize that, over the time period that the forward contract remains outstanding, an adjustment to the weighted average number of shares assumed to be outstanding in calculating diluted earnings per share must include the effects of settlement of the forward contract in shares (if it is dilutive). Thus, if share prices have increased since the closing date of the treasury stock purchase (which is likely, given the demand pressure exerted by the stock repurchases), the company will have an additional obligation to issue shares (or pay cash) to the investment bank that must be taken into account when calculating diluted earnings per share.


Assume that XYZ Corporation has 2 million shares of its $1 par value common stock outstanding on January 1. On this date, XYZ enters into an ASR agreement with an investment bank to repurchase and retire 500,000 shares of common stock at the January 1 market price of $20 per share. Pursuant to this agreement, XYZ may receive from, or be obligated to pay to, the investment bank a “price adjustment” based on the volume-weighted average share price paid by the investment bank to satisfy the bank’s short position. The program occurs under the following conditions:

  • Share purchases by the investment bank occur evenly over the six-month period from January 1 to June 30.
  • XYZ’s net income (NI) for the first and second quarters equal $1 million each.
  • Had XYZ chosen instead to undertake a traditional open-market share repurchase program, the acquisition of shares would have occurred evenly over the six-month period from January 1 to June 30.
  • XYZ has no dilutive securities (other than the forward contract associated with the ASR program) and no outstanding preferred stock.
  • XYZ’s stock price is $24 per share on March 31 and $28 per share on June 30.

The volume-weighted average price of shares repurchased by the investment bank equals $22 per share for quarter one and $24 per share over the first six months.

Under the ASR program, XYZ reports diluted earnings per share for the first quarter as follows:

$1 million NI/(1,500,000 shares + 41,667 contingent shares) = $0.65/share.

The contingent shares relate to the forward contract and would be calculated as follows:

500,000 shares x ($22 avg. mkt. price–$20 ASR price) = $1million/$24 market price at Q1 end.

Similarly, under the ASR program, quarter two–diluted EPS is as follows:

$1 million NI/(1,500,000 shares + 71,429 contingent shares) = $0.64/share

In the above calculation, the 71,429 shares are calculated by multiplying the 500,000 repurchased shares times the $24 volume-weighted average price, less the $20 ASR price, to determine the required payment to the investment bank of $2 million. At an end-of-quarter price of $28, $2 million is equivalent to 71,429 shares.

In contrast, had XYZ chosen an open-market share repurchase, earnings per share in the first two quarters would be calculated in the following manner:

For quarter one:

$1 million NI/1,875,000 weighted average shares = $0.53/share

For quarter two:

$1 million NI/1,625,000 weighted average shares = $0.62/share

In both instances, and especially in the first quarter, the immediate and dramatic effect of the reduced share base is reflected in reported earnings per share.

No Safe Harbor Provisions

Another important difference for ASRs is that, unlike normal share buyback, they are not covered by the safe harbor provisions of SEC Rule 10b-18. The SEC ruled that ASRs and forward contracts are private transactions, ineligible for the safe harbor provision that applies to open-market purchases. In addition, whereas brokers executing traditional share buybacks are covered by the safe harbor provision as long as certain time, volume, and price provisions are met, investment banks acting as brokers for ASRs receive no safe harbor. The SEC does not extend the safe harbor to these brokers because it ruled that the trades are not riskless principal trades effected on behalf of the original security issuer.

The EITF has provided guidance to companies contemplating this type of transaction. The repurchased shares must be treated as treasury stock and, separately, a forward contract must be acknowledged and accounted for that represents the right or obligation to receive or pay additional compensation to or from the investment bank as a function of subsequent share price movements. If, on a financial reporting date, the forward contract represents an obligation to issue additional shares to the investment bank, those additional shares must be treated as issued and outstanding when calculating diluted earnings per share.

Donald P. Pagach, PhD, CPA, and Bruce C. Branson, PhD, are both professors of accounting at North Carolina State University, Raleigh, N.C.




















The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

©2009 The New York State Society of CPAs. Legal Notices