Treasury Stock, Shareholder Equity

[rexthedog]

Why do we remove subtract treasury stock when calculating Shareholder equity.
Is it because firms repurchase these shares so therefore as you’re paying for it cash is flowing out and thus equity goes down?
Quite seperately, are DTA and DTL’s current or non current? Say for example you are calculating a current ratio and you are also given in the data DTL and DTA, would these be included in the ratio? I would assume you would add the DTA to the assets numerator and the DTL to the liabilities denominator?

 

[S2000magician]

rexthedog wrote:Why do we remove subtract treasury stock when calculating Shareholder equity.

When the company repurchases stock at Treasury stock, it is no longer outstanding: shareholders no longer own it, so it is not part of shareholder equity (ownership).

rexthedog wrote:Is it because firms repurchase these shares so therefore as you’re paying for it cash is flowing out and thus equity goes down?

Yes.

rexthedog wrote:Quite seperately, are DTAs and DTLs current or non current? Say for example you are calculating a current ratio and you are also given in the data DTL and DTA, would these be included in the ratio? I would assume you would add the DTA to the assets numerator and the DTL to the liabilities denominator?

For the purposes of the exam, assume that DTAs and DTLs are not current assets or current liabilities (respectively) unless the problem specifically says that they are.
In the real world, they could be current or noncurrent, depending on when the company expects to see the benefit (DTA) or detriment (DTL).
Accordingly, when I teach FRA and get to the quick ratio, I tell the candidates not to write the numerator as
current assets – inventory
but, rather, as
cash + short-term investments + accounts receivable
If the company has a current DTA, you don’t want that in the quick ratio; it would be included in the first formula.

 

[elcfa]

S2000magician wrote:
In the real world, they could be current or noncurrent, depending on when the company expects to see the benefit (DTA) or detriment (DTL).

This is correct only in USGAAP. For IFRS, the standard states that DTA and DTL are always non-current (IAS 1 Presentation).

 

[S2000magician]

elcfa wrote:

S2000magician wrote:In the real world, they could be current or noncurrent, depending on when the company expects to see the benefit (DTA) or detriment (DTL).

This is correct only in USGAAP. For IFRS, the standard states that DTA and DTL are always non-current (IAS 1 Presentation).

Thanks for the clarification: I was talking about US GAAP.

 

[rexthedog]

Clarified,
Thanks