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A treasury stock method is the system by which a company accounts for stock it has issued and then reacquired. There are two main types of treasury stock method, known as cost and par value. With both types, there may be some legal restrictions on how the accounts are prepared.
Despite the name, treasury stock in the United States has nothing to do with a government's financial department. It does not refer to financial products such as treasury bills, the government equivalent of a company bond. Treasury stock is purely related to companies which are publicly traded. The name can be particularly confusing, as in the United Kingdom, treasury does indeed refer to government-issued debt-based products. The UK instead uses the term treasury share to refer to reacquired stock.
A company can create treasury stock by buying previously issued and traded stock back from investors. This could be done as a way of giving cash to stockholders rather than issuing dividends. It can also be a way of making it harder for another company to launch a successful takeover bid. It should be noted that though treasury stock is "created," the total number of shares remain the same, while the number of shares available for trading on the markets actually falls. The creation of treasury stock is in fact a conversion rather than a true "creation."
There are a couple of implications from the creation of treasury stock. One is the way it is listed on balance sheets. The usual system is to list it as a negative figure in the shareholder equity category. This category effectively represents the total money that stockholders have invested in the company. This figure would become significant if the company was liquidated.
Some form of the treasury stock method is also needed to track the stock when it is bought back by the company, plus if and when it is then resold to the public. One option is the cost method, in which the money raised or spent is applied to the paid-in capital category. This category usually lists any money raised from investors beyond the face value of their stock.
Another treasury stock method is par value. With this method, when stock is bought back it is simply listed as moving from traded stock to treasury stock, making no change to any other section of the accounts. If and when it is then resold to investors, the accounts are revised in the same way as with the cost method.
A company that uses the treasury stock method simply reduces the number of available shares for purchase by shareholders. Treasury stock shares are shares that have already been paid for, and are held by the company. Companies do this sometimes if they believe that the price per share is too low. When a company reduces the number of available shares, the price per share may increase. This doesn't always happen though.
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