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Buy-out Legal Fees and Treasury Stock

Can we include legal costs associated with a buy-out as part of the cost of creating a treasury stock?

You should be aware that, whether expensed or added to the contra- equity (treasury stock) account, most outsiders (e.g., creditors) will assess the entity’s net tangible capital as stockholders’ equity, net of treasury stock, and thus the impression of the balance sheet strength of the company will not be affected by the choice of accounting.

Note that there doesn’t appear to be any basis for capitalizing (i.e., deferring) the legal costs and amortizing them as additional interest cost. The legal costs were — it appears from your question — associated with acquiring the former owner’s shares, and not with arranging financing. Thus, there is no analogy to “points” or other financing fees.

Finally, normal financing costs (interest, etc.) should be charged to the income statement, and not considered part of the cost of the treasury stock. The reason is that financing costs are period costs, irrespective of how the borrowed funds are used (the sole exception: if used for long-term construction projects, the interest cost is added to the cost of the project). How your company raised the cash to execute the buy-back of shares is irrelevant to the cost of the treasury stock; if some or all of the funds were raised by borrowing, interest expense will be a period cost nevertheless.

Barry Jay Epstein, Ph.D., CPA
Partner, Gleeson Skar Sawyers & Cumpata, LLP

See previous “Ask the Experts” columns:

A Merger Accounting Scenario

Use Tax

A FAS 133 Example

Leasing Accounting

Goodwill Taxing

Recognizing Upfront Fees

Proving Tax-exempt Status

The ABCs of OECD

Credentials for Credit

Big Five Audits and Venture Funding

GAAP for Private Firms

Transfer-Pricing Guidelines

Insurance for E- business Infrastructure

401(k) Brokerage Links

Navigating the Rough Waters of Sales Tax

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