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The theoretical basis for the case is information asymmetry and signaling theory, with buybacks providing a mechanism for reducing information asymmetry between management and investors. The controversy surrounding buybacks has led to political and regulatory scrutiny, which, consistent with evidence from academic research, may affect corporate behavior.

The compact case is based on secondary, public information about stock buybacks. All sources used are cited in-text, with full citations included in the references section at the end of the teaching note.

Stock buybacks, a means of providing returns to shareholders, have recently received increased scrutiny by politicians, media and shareholder activists. Proponents have argued that buybacks result in efficient allocation of capital by returning funds to shareholders, whereas opponents have criticized buybacks for enriching executives, providing tax advantages to shareholders and contributing to income inequality. Corporations did not curtail their use of buybacks after the Inflation Reduction Act of 2022 imposed an excise tax. The case frames the buyback debate in current events and focuses on the buyback activity of Apple. The case provides students the opportunity to analyze alternative ways that companies can provide returns to shareholders, evaluate impacts of buybacks on corporate stakeholders and appraise the reasons for, and implications of, current controversy regarding buybacks.

This compact case is appropriate for upper-level undergraduate or graduate courses in financial accounting, tax and finance. This case provides an opportunity to analyze and evaluate stock buyback decisions in the context of the current controversy related to buybacks.

In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 entitled “Accounting for Stock‐BasedCompensation.” The FASB began looking at the issue in 1984, at the request of many, including the Securities Exchange Commission (SEC), the American Institute of Certified Public Accountants (AICPA), the largest public accounting firms, industry representatives, and others in the accounting profession. Even before the FASB issued its exposure draft on the subject in 1993, however, controversy began to surround its deliberations and decisions. The FASB’s exposure draft proposed that the cost ofstock options be expensed on the income statement, consistent with other forms of compensation. This differed greatly from the accounting rules of APB Opinion 25 in effect at the time, which usually resulted in no compensation expense on the income statement. As might have been expected, many companies did not relish the idea of expensing something that previously had no effect on their bottom line. Pressure to modify its position was exerted on the FASB by the very organizations that had asked FASB to look into the issue in the first place. As a result of the controversy and accompanying pressure placed on the FASB, Statement 123 is a compromise that encourages, but does not require, the recording of compensation expense as it relates to stock options.Footnote disclosures of the effects of the new standard on net income and earnings per share are required for companies that elect to continue to apply the provisions of Opinion 25. Although the FASB took up this issue in 1984, and the intense controversy over it began in 1993, the discussions and disagreements over accounting for stock‐based compensation are not new. Differences of opinions are evident in the accounting literature as far back as the 1920s. While the definition of a stock option has not changed much since those early days, the exact purposes,uses, and accounting treatments have never been agreed upon. This paper examines some of the various positions that have been put forth over the years, looks at the recent FASB actions and controversy, and attempts to look forward at what might lie ahead in this area.