The board of directors for Atlantic Corporation met in January to address growing concerns about the declining share price of the firm. Because the price per share was so low, the board decided that the company would buy back 10 million outstanding shares. During the year, Atlantic Corporation repurchased the shares at a total cost of $62 million. With fewer shares in the hands of shareholders, the board of directors declared and paid a dividend on only those remaining shares outstanding. As a result of these activities, the price per share rose dramatically in only 10 months. The board of directors then felt it best to reissue the treasury shares at the highest per share price possible. Accordingly, Atlantic Corporation reissued the 10 million shares for $142 million. When the board of directors looked over the yearly financial statements, however, it could not find the $80 million “gain” from the treasury shares sale, equal to the reissue price of $142 million less the purchase cost of $62 million. The accountant had recorded the excess as “Additional Share Capital” rather than as a gain on sale. The board of directors met with the accountant and demanded that a gain be recorded; the board wanted more revenue to be included on the income statement. It argued that shares had been sold at a price higher than they were purchased for, and, therefore, it really did not matter whether the shares were Atlantic Corporation shares or any other company’s shares, because all share sales result in either a gain or loss.
Why does the board of directors want to recognize the $80 million excess from the treasury share transactions as a gain? Why does the accountant want to recognize the $80 million as an increase in total equity? Who is right and are any ethical issues involved? Does the board of directors have a strong argument that it does not matter whether the shares were Atlantic Corporation shares or any other company since all shares are the same? Do you have any additional thoughts?