Question

Case study 3: Victory SAOG is registered with an authorized capital of OMR 50 million ordinary shares of 100 baiza each. The company had issued and paid up capital of OMR 33 million. In the year 2017 Victory SAOG has an outlined share repurchase program which would enable the company to repurchase at least 10 per cent of its outstanding shares. The company had an opening balance of OMR 55 million in its retained earnings account. After completing the required formalities for such repurchase in the vear 2017, the company was able to repurchase the 19.8 million shares valued at OMR 31,680,000 in the month of August. Later in the year 2019 the company was able to repurchase another 10 million shares for OMR 15 million in July.

The following are the profits earned by the company over the period of 2017 to 2019: OMR in Millions'
2017: 110
2018: 150
2019: 160

The company decided to distribute dividends as mentioned below:
#Interim dividend:
2017: Nil
2018:5%
2019:Nil
#Final dividend:
2017:10%
2018:15%
2019:20%
Final dividends are proposed in same year but always approved and paid in the succeeding year.

You are required to evaluate the overall scenario and answer the following questions:

a. Was the company able to achieve its target with its shares repurchase program, justify your answer with suitable calculations? Also briefly discuss as to why does a company voluntarily give millions of Rials back to stockholders in order to repurchase its own stock instead of investing such money in its own business? (3 marks – Min 150 words)

b. Provide with all necessary calculations the accounting treatment for such repurchase of shares transactions? 11/A

c. Provide with all necessary calculations and accounting treatment with regards to dividends and retained earnings for the period 2017 2019?

Answer 1

Answer a

Based on the below working it can be seen that the company had planneed to buy back 33 million shares, however it was able to buy back only 29.8 million shares.

Paid up capital	33.00	330,000,000
10% of Shares		33,000,000
Aug-17	31.68	19,800,000
Jul-19	15.00	10,000,000
Total Repurchase		29,800,000

There are many reasons as to why a company buy back its own shares. The most important reasons is the company has surplus cash and does not find any suitable growth opportunities where this excess cash can deployed to generate shareholder value. In such a case, the company chooses to buy back the shares and give the cash to shareholders, so that shareholders themselves can deploy that cash and earn returns. Another main reason for buy back is the company wants to have more ownership and by doing a buyback it reduces external holding and thus gives an opportunity for better returns to the remaining shareholders. Another reason is when the management of the company believes that the stock price is not reflective of the existing state of the company and the market has discounted the value way below the fair price, the management would decide to buy back to demonstrate that the company is sound and instill confidence to the shareholders. Lastly with a reduction in capital due to buy back most of the financial ratios linked to equity would improve.

Working of No of Shares and Equity Capital Balance as at each year end

Opening Equity Jan 17		330,000,000
Buy Back on Aug 17		(19,800,000)
Closing Balance Dec 17		310,200,000
Closing Balance Dec 18		310,200,000
Buy Back on Jul 19		(10,000,000)
Closing Balance Dec 19		300,200,000

Answer b

		Debit	Credit
Aug-17	Equity Capital	1,980,000
	Retained Earnings	29,700,000
	Cash		31,680,000
Jul-19	Equity Capital	1,000,000
	Retained Earnings	14,000,000
	Cash		15,000,000

'

Answer C

Working of Retained Earnings Balance

		Retained Earnings
1/1/2017	Opening Balance	55,000,000
8/1/2017	Buy Back	(29,700,000)
12/31/2017	Profit for the year 2017	110,000,000
12/31/2017	2017 Final Dividend	(31,020,000)
10/1/2018	2018 Interim Dividend	(15,510,000)
12/31/2018	Profit for the year 2018	150,000,000
12/31/2018	2018 Final Dividend	(46,530,000)
12/31/2019	Profit for the year 2019	160,000,000
12/31/2019	2019 Final Dividend	(60,040,000)
	Closing Retained Earnings	292,200,000

Accounting Treatment for declaration of Dividend (Interim or Final)

Dividend (P&L) Debit (I have given the impact on the Retained Earning for the declaration of dividend i.e Retained earnings decreases as the dividend is declared)

Dividend Payable Credit

Accounting Treatment for payment of Dividend (Interim or Final)

Dividend Payable Debit

Cash Credit