ACCA Applied Skills · Corporate and Business Law (Global) · Share capital
Altair Co has distributable profits and wishes to buy back some of its own shares from a shareholder. Which statement best describes the accounting consequence of a lawful buyback paid for out of distributable profits?
The shares are cancelled and the nominal value is transferred to a capital redemption reserve. This keeps the company's non-distributable capital intact, protecting creditors when distributable profits are used to pay for the shares. The shares are not held as an asset and share premium is not increased.
- AThe shares are cancelled and an amount equal to their nominal value is transferred to a capital redemption reserveCorrect
- BThe shares are kept as an asset of the company and shown in the statement of financial position
- CThe nominal value of the shares is added to the share premium account
Explanation
When shares are bought back out of distributable profits, the share capital falls but creditors' protection is maintained by transferring the nominal value of the cancelled shares to a capital redemption reserve. The company cannot treat its own shares as an asset, and share premium is not increased.
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