Why do share repurchases reduce equity? If the parent company is buying back the shares don’t they still maintain the same value?
equity = assets - liability
you are using cash assets to buy the shares.
according to what you are saying, if the company issues equity shares, it would decrease the value of equity and not increase it. When a company buybacks its own shares, they generally destroy those shares and hence now less people are holding the equity shares thereby reducing the equity.
Okay that was my question i know they use cash but i was wondering if they always destroy the shares or if they can record the shares as an asset?
They don’t have to destroy the shares, but they don’t show them as an asset; it’s contra-equity: Treasury Stock.
In a perfect market (no taxes…etc), It doesn’t nessecarily reduce the market value of equity. If the effect on the capital structure does not change the cost of debt, then the market value of equity should remain almost the same. In reality, if you are below your optimal leverage, then the market value of equity may increase after the buybacks. That depends on whether the amount of cash expended and the higher levered capital structure is offset by the reduced invested equity.
What it really does is transfer shareholder wealth, but the firm value remains generally the same (unless the buyback is significant.)
To add to what Bill said - treasury share (or stock in the US) is a repurchased share which by definition is presented on the balance sheet as a negative equity number. Back to the original question “why is it negative” - just think about it as a reversal of the original scenario: when a company issues shares it gathers assets (Dt Cash) while its share capital also increases (Ct Shareholders equity); when it repurchases stock it’s the other way round.
See IAS32.33:
“If an entity reacquires its own equity instruments, those instruments (‘treasury shares’) shall be deducted from equity. No gain or loss shall be recognised in profit or loss on the purchase, sale, issue or cancellation of an entity’s own equity instruments. Such treasury shares may be acquired and held by the entity or by other members of the consolidated group. Consideration paid or received shall be recognised directly in equity.”
thank u everyone, much clearer!