Eye on stock repurchases

Published July 23, 2019

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Stock repurchases have skyrocketed in recent years, fueled, in part, by cash flow generated by the Tax Cuts and Jobs Act (TCJA) and the availability of inexpensive debt capital. So-called “buybacks” have become a political hot button, and some lawmakers want to enhance the information companies provide to shareholders about these transactions.

A troublesome trend

Share repurchases by companies have shot up over the last decade. The total value of share repurchases by companies surged to a record $806.4 billion in 2018, up 55% from a year earlier, according to a March 2019 report from S&P Dow Jones Indices. The record was more than 36% higher than the previous high-water mark hit in 2007.

Apple led in buybacks, spending $10.1 billion in the fourth quarter of 2018. Other companies that spent large sums to buy back shares include:

  • Oracle ($10 billion),
  • Wells Fargo ($7.3 billion),
  • Microsoft ($6.4 billion), and
  • Merck ($5.9 billion).

In May, Richard Hecht, a former vice president of the New York State Society of CPAs, wrote a letter to the Financial Accounting Standards Board (FASB). He criticized the lack of accountability for the results of stock repurchases, saying, “The accounting profession has stuck its head in the sand to avoid dealing with this major issue. I feel strongly that if the accounting profession, through the FASB, continues to ignore this issue, it will pay a heavy price.”

Hecht believes that, if the stock market collapses, companies that borrowed funds to repurchase stock at today’s relatively high market values might not be able to repay the debt. This could lead to another corporate debt crisis, similar to the financial crisis of 2007.

Need for change

Under current U.S. Generally Accepted Accounting Principles (GAAP), stock repurchases by a company are reported as “treasury stock” on the equity section of the balance sheet. Buybacks are reported at historic cost, without any subsequent evaluation to record whether the stock was purchased at a reasonable price.

Hecht wants the FASB to revise the current accounting method for recording stock buybacks to help shareholders gauge whether management made or lost money on the use of shareholder funds to buy back a company’s own common stock.

If corporate funds are used to buy publicly traded stock in a third corporation, it’s valued at current market value. “Why is stock in your own corporation treated differently? There is hardly any accounting literature in the ASCs and ASUs dealing with the value of treasury stock,” said Hecht.

In general, concern is mounting that a historic cost framework to report stock buybacks is problematic. It often creates a situation in which the book value of treasury stock differs significantly from the stock’s current fair market value.

Will the FASB change the accounting rules?

During a meeting on May 8, FASB members discussed share repurchases, including the various SEC requirements for reporting buybacks. However, the FASB decided not to add a project to its agenda to address this issue.

In the meantime, Congress is considering legislation designed to provide more information on buybacks and possibly to prevent companies from buying back stock on the open market. Stay tuned for more information, and contact your MCM professional for more information.