Accelerated Share Repurchase - Explained
What is Accelerated Share Repurchase?
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Table of ContentsWhat is Accelerated Share Repurchase?How does an Accelerated Share Repurchase Work?Example of an Accelerated Share RepurchaseAccounting for an ASRAcademics Research on Accelerated Share Repurchase ASR
What is Accelerated Share Repurchase?
An Accelerated Share Repurchase (ASR) is also known as an accelerated buyback. It is a method used by a corporation, usually a corporation that issue stocks to repurchase its stocks for specific purposes. When a corporation buys back a large number of stocks issued by them, it is called an accelerated share repurchase.
ASR entails that the corporation that wishes to buy back its shares or stocks enter a forward contract with an investment bank and pays cash (down payments) to the bank. Another way that an accelerated repurchase can occur is a situation in which an investment bank shares from clients or lenders and release or return the shares to them in the open market.
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How does an Accelerated Share Repurchase Work?
Corporations that engage in accelerated share repurchase do this for their own benefits. When a company desires to reacquire its shares which it had earlier sold or leased to an investment bank, it is an accelerated share repurchase or buyback. Accelerated share repurchase can either be done by entering a forward contract with an investment bank in which an upfront payment is made or by buying back sold shares or loaned shares in an open market. The risks of buy back are often transferred to an investment bank in exchange for a premium that the bank receives.
Example of an Accelerated Share Repurchase
This is an example of accelerated share repurchase; If Company A initiates a repurchase program, it can buy back all its shares that it has previously issued. In an accelerated share repurchase agreement, Company A can make an upfront payment of let's say $200 million to an investment bank in exchange for millions of shares or stocks.
If Company A wished to buy back 10.35 million shares, the upfront payment allows Company get a part of the amount shares and one the ASR is settled (the balance paid to the bank) Company A is entitled to the remaining number of shares. ASR method is a faster and less-risky approach of repurchasing shares.
Accounting for an ASR
As required under GAAP generally accepted accounting principles), if a corporation makes a forward contract agreement with an investment bank, the forward contract serves as an equity instrument. A corporation that makes an upfront payment to the investment bank collect some part of the shares, in a case where fluctuation in market price affects the value of the remaining shares, the investment bank will not be held liable.
Rather, the corporation assumes the liability and incurs all the losses. Increase in the value of share amounts to account receivable by the company while in decline in price leads to account payable. Fluctuations in market value can either be positive (increase) or negative (fall), in any case, the company assumes both the receivable and payable.
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