Question

Need to identify the financial reporting issue below:

At the date of incorporation, the company had issued 2,000,000 common shares for $10 per share. On February 1, 2019, 20,000 of the shares were repurchased and cancelled by the company. The controller included the $1 million cost of this repurchase in operating expenses. The company had issued a call option in 2018, expiring in 2020 and allowing the holder to purchase 40,000 shares for $40 per share. The average share price in 2019 was $51. Company reports under IFRS.

Given:

EPS given: ($9,800,000/2,000,000) = $4.90

Answer 1

The main financial reporting issue in this case is that the controller included the $1 million cost of repurchase of shares in operating expenses. The correct accounting treatment for repurchase of shares is:

1. In the liabilities segment of the balance sheet, reduce the share capital amount with the amount paid for repurchase of shares and reduce the number of shares in share capital with the number of shares repurchased.
2. In the assets segment of the balance sheet, reduce the cash or bank balance with the amount paid for repurchase of shares.