Recently I was involved in a stock repurchase and wanted to share my understanding. A couple of scenarios:
- An ex-employee had exercised her options a few years ago, company decides to buy back the stock at a price higher than what the employee paid. How do we account for it in our books?
- When the stock was exercised, the company would have booked: Debit Cash Account – Credit Stock Account
- When the stock is repurchased, the company would book : Debit Stock Account – Credit Cash
Does this transaction constitute as compensation for the ex-employee as the repurchase price is higher than purchase price? The company doesn’t have to report it as compensation. The ex-employee would account for the capital gain on their own tax filings.
- An employee had exercised her options a few years ago, company decides to buy back the stock at a price higher than what the employee paid. How do we account for it in our books?
- The accounting is same as that of an ex-employee
- An employee has vested but not exercised options, company decides to buy back the stock at the current Fair Market Value, which is higher than the option’s exercise price. How do we account for it in our books?
- The difference between the current FMV and the exercise price would be accounted for as compensation to the employee. This will be reported on the employee’s W2 in Box 12.