Treasury Shares in Demergers – Commonly Observed Non-Compliances Under Ind AS 32

1. Introduction

Treasury shares represent an entity’s own equity instruments that are re-acquired and held either directly by the entity or indirectly through a subsidiary or any other entity under its control. Ind AS 32, Financial Instruments: Presentation sets out clear guidance for the accounting and presentation of treasury shares, yet these guidanceis frequently misunderstood in practice. One of the most commonly observed non-compliances relating to treasury shares pertains to their incorrect presentation in the financial statements. Here we have explained the non-compliance with the help of case scenario.

2. Facts

Radiant Limited hereinafter referred to as “the company” is engaged in the business of manufacturing of electronic equipment. The company operates through two divisions, namely the hardware division and the software division. Considering the adverse financial affects, the company decided to go for demerger. Thus, under the scheme of demerger approved by the “High Court”, the company transferred its software division to an independent trust. It is hereby important to note that, the company retained a beneficial interest in the trust.

The assets transferred to the trust comprised investments in equity shares of the company, investments in associate companies and other unlisted companies, along with the related borrowings and liabilities of the software division. Despite the shares of the company legally held by the independent trust, the company continues to have rights over the economic benefits arising from the sale of such shares.

The company’s shares held by the trust are intended to be sold and the proceeds thereof are to be realised for the benefit of the company. Thus, the company is of opinion that the beneficial interest held by the company in the trust shall be treated as financial assets.

3. Relevant Provision of Ind AS 32

Para 33 of Ind AS 32

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 and 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.

Para AG 36 of Ind AS 32

An entity’s own equity instruments are not recognised as a financial asset regardless of the reason for which they are reacquired. Paragraph 33 requires an entity that reacquires its own equity instruments to deduct those equity instruments from equity. However, when an entity holds it sown equity on behalf of others, eg a financial institution holding its own equity on behalf of a client, there is an agency relationship and as a result those holdings are not included in the entity’s balance sheet.

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