Question

Intuit Inc. is a leading provider of innovative business and financial management solutions for small businesses, consumers, accounting professionals and financial institutions. Their flagship products and services include QuickBooks, TurboTax and Quicken.

In the notes to its financial statements for the year ended July 31, 2015, Intuit Inc., states:

Intuit’s Board of Directors has authorized a series of common stock repurchase programs. Shares of common stock repurchased under these programs become treasury shares. Under these programs, we repurchased 13.8 million shares of our common stock for $1.2 billion during the twelve months ended July 31, 2015; 2.5 million shares for $1.6 billion during the twelve months ended July 31, 2014; and 4.8 million shares for $292 million during the twelve months ended July 31, 2013. At July 31, 2015, we had authorization from our Board of Directors to expend up to an additional $2.6 billion for stock repurchases through May 19, 2019. Future stock repurchases under the current program are at the discretion of management, and authorization of future stock repurchase programs is subject to the final determination of our Board of Directors.

Our treasury shares are repurchased at the market price on the trade date; accordingly, all amounts paid to reacquire these shares have been recorded as treasury stock on our balance sheets. Repurchased shares of our common stock are held as treasury shares until they are reissued or retired. When we reissue treasury stock, if the proceeds from the sale are more than the average price we paid to acquire the shares we record an increase in additional paid-in capital. Conversely, if the proceeds from the sale are less than the average price we paid to acquire the shares, we record a decrease in additional paid-in capital to the extent of increases previously recorded for similar transactions and a decrease in retained earnings for any remaining amount

• Why would a company buy back its own stock?
• What conditions must be present in the company to make a large buyback possible?
• What would Intuit do with all this stock? What future benefit might it have?
• How do they account for treasury stock?

Answer 1

A company would buy back its own stock if the share prices have fallen, and the shares are now available at attractive valuations. Also, the company as of now does not have any better investment opportunities. Buying back stock has the advantage of reducing the outstanding number of shares, whereby, all else remaining same, the earnings per share increases. This would cause the market price of the stock to increase, and enable maximization of shareholder wealth. A company would also resort to a buyback if there is a possibility of a hostile takeover of the company.

For such a large buyback to be possible, the company must have ample idle cash on its balance sheet, as you need cash to buy up stock.

Intuit Inc. would hold all this stock till the market price of the stock increases, aided by an increased EPS and turnaround in the economy. Then the company can reissue these shares for a hefty gain, which further adds to shareholder wealth. On the other hand, if the management feels that the company is overcapitaized, the company might even retire the stock.

At the time of buyback, treasury stock account is debited, with a corrsponding credit to cash.

At the time of reissue of the treasury stock, cash is debited by the sale proceeds, treasury stock account is credited by the cost of the treasury stock. If the reissue happens at a price higher than cost, the excess is credited to additional paid in capital. On the oher hand, if the reissue happens at a price below cost, any additional paid-in capital from a prior reissue of treasury stock is first debited to compensate the loss. If it is not enough, retained earnings would be debited for the balance.