In the U.S., Jack creates a C-corporation and funds it with $100, receiving 100 shares in return. Greg, a passive investor, then gives the company $900 in exchange for 900 newly issued shares. The bank account of the company now contains $1000, and the 1000 issued shares each have a value of $1.
Immediately after investing, Greg gets cold feet and wants out. The company buys back his 900 shares for $900. The company—rather than canceling the received shares—retains them as an asset, and values them at $900. So the value of the company still stands at $1000: $100 in cash + $900 in stock.
So, to review, the book value of the company has grown from $100 to $1000 merely as the result of one investor coming and going. No company business or anything else occurred to account for this increase in book value. Meanwhile, it seems intuitively clear that the "actual" value of the company is just $100.
Are private and public companies legally permitted, by 10b-18 or other statutes, to do buybacks like this (as this article might be taken to suggest)? If so, why doesn't this allow the financial data of the company (such as total assets, shareholders' equity, and so on) to be wildly misleading to investors?
Here are several online references—encountered after posting—that partially address the above questions (without citing relevant law, SEC guidance, or court precedents):
This Forbes article states that: "It's important to understand that once a company has bought back its own shares, they are either canceled—thereby permanently reducing the number of shares outstanding—or held by the company as treasury shares. These are not counted as shares outstanding, which has implications for many important measures of a company’s financial fundamentals."
Additionally, this Wikipedia article on treasury shares states that: "The possession of treasury shares does not give the company the right to vote, to exercise preemptive rights as a shareholder, to receive cash dividends, or to receive assets on company liquidation. Treasury shares are essentially the same as unissued capital, which is not classified as an asset on the balance sheet, as an asset should have probable future economic benefits. Treasury shares simply reduce ordinary share capital."
(The bolding above is mine, and included for clarity.)
Finally, this Investopedia gives at least a partial explanation of how the accounting of treasury stock is supposed to work.