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Share buy-back accounting entries

On 09 March 2011 Jennifer Adams posted an article on, Share buy-backs: Get the details right.  The accounting entries puzzle me.  For example.  A shareholder subscribed and paid in full for 90,000 £1 ordinary shares 10 years ago.  This is a private trading company and the buy-back will benefit the trade.  The payment for the shares is to be £146,000.  This could be settled by three means (i) bank payment £45,000 plus (ii) loan £20,000 plus (iii) stock £81,000.

Debit Share Capital £90,000 and Debit ??? £56,000

Credit Bank £45,000 Credit Loan £20,000 and Credit Stock £81,000

Query - is Debit ??? = the Profit and Loss b/fwd balance?

Also as stock would have to be sold at market value, not cost, and VAT would have to be added to the sale price this would appear to knock this idea on the head as the former shareholder will not be a VAT registered business in her/his own right.


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19th Aug 2011 13:08

reserves in following order:

as the payment is more than the nominal value, then the excess should be posted against reserves as follows:

If the permissible capital payment is greater than the nominal value:

(a) the amount of any capital redemption reserve, share premium account or fully paid share capital of the company, and

(b) any amount representing unrealised profits of the company for the time being standing to the credit of any revaluation reserve maintained by the company,

may be reduced by a sum not exceeding (or by sums not in total exceeding) the amount by which the permissible capital payment exceeds the nominal amount of the shares.

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22nd Aug 2011 08:04

I think TonyKelly may be getting mixed up with ....

....  a purchase of own shares out of capital. The phrase "permissible capital payment" relates only to this (rare) type of buyback. It looks to me like what you have is a purchase of own shares out of distibutable proifts.

Either way, the correct entries are:-

1: Debit profit and loss account b/fwd £156,000 credit bank £45,000, credit loan £20,000 and credit stock £81,000.

2: Debit share capital £90,000, credit capital redemption reserve £90,000

The entries at 1: above reflect the somewhat unusual payment arrangements in this case. Normally it would be just credit bank with the whole £156,000. Are you sure the loan won't prejudice the CGT treatment for the exiting shareholder?

You may well be right about the stock and VAT. The easiest way to envisage this is to assume that the vendor is being paid out fully in cash and then buying the stock with part of that cash. VAT will be chargeable unless you can get the transaction within the TOGC rules.

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By yeboyye
22nd Aug 2011 21:33

Thanks to you both.  MBK is correct, the purchase I am thinking about will be out of distributable profits.  HMRC Tax Bulletin 21 (going back a bit but still in use) explains the loan position and we are alright there.  Net result is Capital and Reserves reduced by £56,000.

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