In a recent article by the Thompson Reuters news agency, Scott Ehrlich, President of Mind the GAAP, shared his views on the current accounting requirements for share buy-backs. Read the article.

Note: Much of Mr. Ehrlich’s interview was left on the “cutting room floor”.  In addition to the quotes appearing in this article, Mr. Ehrlich also shared the following additional insights:

“My take is that outside of US GAAP, a fair number of companies make some disclosure about the fact that they have a buyback program, including the amount authorized by the Board to buy back shares over the life of the program.  I think most companies view buyback programs as” positives” and they almost want to advertise the fact that they are undertaking buybacks.

US GAAP, interestingly, doesn’t require very much disclosure at all around share buybacks.  If material, the statement of cash flows would typically include a line item indicating the cash paid for stock repurchases.  But apart from that one disclosure, there’s not much else required in ASC 505 or other Codification sections around repurchase programs.

I would support more disclosure in this area, but not a fundamental change to how buybacks are reported in the financials.  I think the GAAP around buybacks is fine, but readers of financial statement should be able to better evaluate the effects of a buyback on EPS as well as if, with the benefit of hindsight, management has made good resource decisions in repurchasing its own stock.

Specifically, possible disclosure enhancements I’d support could include:

  • The total amount spent on share repurchased in the reporting period, if not already separately presented in the statement of cash flows
  • The amount of shares repurchased each reporting period and the weighted-average price at which the shares were repurchased
  • A performance graph, showing the previous five years of stock repurchase activity (i.e., number of shares repurchased and weighted-average repurchase price) juxtaposed alongside the company’s average share price, and range of share prices (low to high) for the same reporting period.  This disclosure would help users of the financials determine whether management made a prudent decision in buying back shares, or perhaps should have allocated its resources to other wealth creating activities.
  • For each period presented, “pro forma EPS” had the company not repurchased shares in the reporting period.  This disclosure would help financial statement users understand the effect on EPS resulting from the company’s buyback activities.”