ASC 505-10
Overall
505 Equity
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ASC 505-10 is the residual "Overall" subtopic for equity — it covers equity matters not addressed in the other Equity subtopics (stock dividends/splits, treasury stock, spinoffs) or in other Topics such as 480 and 815. Its core rules are that transactions in an entity's own capital stock (and quasi-reorganization adjustments and transfers to/from appropriated retained earnings) never affect net income, that additional paid-in capital may not be used to relieve income of charges, and that notes received for stock are generally shown as a deduction from equity rather than as an asset. It also imposes extensive disclosures on the rights and privileges of outstanding securities, convertible preferred stock, redemption requirements, and liquidation preferences.
Key points (7)
- Additional paid-in capital, however created, shall not be used to relieve income of current or future charges that would otherwise hit the income statement (505-10-25-1), except in reorganizations under 852-20-25-2.
- Adjustments, charges, or credits from transactions in the entity's own capital stock, transfers to/from appropriated retained earnings, and quasi-reorganization adjustments are excluded from net income under all circumstances (505-10-25-2).
- A note received as a contribution to equity is generally reported as a deduction from shareholders' equity, not as an asset, unless there is substantial evidence of ability and intent to pay quickly or it is collected in cash before issuance (505-10-45-2); appropriated retained earnings must be shown within equity, with no costs or losses charged to it and no part transferred to income (505-10-45-3 through 45-4).
- Changes in the separate accounts comprising shareholders' equity and in the number of shares must be disclosed for at least the most recent annual period and any subsequent interim period (505-10-50-2), and pertinent rights and privileges of each class of security must be explained (505-10-50-3, 50-13).
- Preferred stock with an involuntary liquidation preference considerably in excess of par or stated value must disclose that preference in the aggregate in the equity section of the balance sheet, not per share or only in the notes (505-10-50-4); call/redemption amounts, cumulative dividend arrearages, dividends declared, and five-year redemption requirements are also required (505-10-50-5, 50-11, 50-15).
- Convertible preferred stock is in scope unless 470-20 or 480-10 requires liability classification, and only after the issuer determines under 815-15 whether an embedded conversion feature must be bifurcated as a derivative; Topic 718 awards are excluded (505-10-15-2(d)); if such stock must be redeemed once the conversion feature expires, it is reclassified as a Topic 480 liability at fair value with a corresponding reduction of equity and no gain or loss (505-10-35-1).
- Pending ASU 2026-01 (annual periods beginning after December 15, 2026): paid-in-kind dividends on equity-classified preferred stock are initially measured using the paid-in-kind dividend rate stated in the preferred stock agreement (505-10-30-1; 505-10-65-1).
For students. The exam favorite here is the bright-line rule that an entity can never recognize gain or loss (or relieve income of charges through APIC) on transactions in its own stock — everything runs through equity. A common misunderstanding is treating a subscription note received for shares as an asset; absent quick collection it must be shown as a contra-equity deduction.
residual interest in net assetsadditional paid-in capitalappropriated retained earningsnotes receivable for stock issuanceconvertible preferred stockliquidation preference disclosurepaid-in-kind dividendsdown round feature
Machine-generated study aid for ASC 505-10. Check the source paragraphs below.
505-10-00Status
Source downloaded: .Record version 9a77719e17bb. Effective date must be checked in the source.
505-10-00-1
The following table identifies the changes made to this Subtopic.
505-10-05Overview and Background
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505-10-05-1
The Equity Topic includes the following Subtopics:
- aOverall
- bStock Dividends and Stock Splits
- cTreasury Stock
- d
- eSpinoffs and Reverse Spinoffs.
505-10-05-2
The Overall Subtopic addresses financial accounting and reporting for equity-related matters not specifically addressed in the other Subtopics of the Equity Topic or other Topics that also address equity matters.
505-10-05-3
Equity, sometimes referred to as net assets, is the residual interest in the assets of an entity that remains after deducting its liabilities. The Subtopics of the Equity Topic provide guidance on several specific elements of transactions, accounts and financial instruments that are classified as components of equity as well as overall general guidance related to equity. Issues that relate to whether a specific financial instrument shall be classified as equity or outside of the equity classification are addressed in Topic 480 as well as other Topics (such as Topic 815 on derivatives and hedging) that address these classification matters.
505-10-05-4
Other Topics, including industry-specific Topics, also contain guidance related to specific equity matters associated with those Topics. Equity guidance in those Topics is intended to be incremental to the guidance otherwise established in this Topic.
Convertible Preferred Stock
505-10-05-5
Entities may issue convertible preferred stock that may be convertible into common stock at the lower of a conversion rate fixed at time of issuance and a fixed discount to the market price of the common stock at the date of conversion.
505-10-05-6
Certain convertible preferred stock may have a contingently adjustable conversion ratio. Examples of a conversion price that is variable based on future events are the following:
- aA liquidation or a change in control of an entity
- bA subsequent round of financing at a price lower than the convertible security's original conversion price
- cAn initial public offering at a share price lower than an agreed-upon amount.
505-10-05-7
Certain convertible preferred stock may become convertible only upon the occurrence of a future event outside the control of the holder.
505-10-15Scope and Scope Exceptions
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Entities
505-10-15-1
The guidance in this Subtopic applies to all entities, unless more specific guidance is provided in other Topics.
Instruments
505-10-15-2
The guidance in this Subtopic applies to all of the following instruments and activities:
- aTransactions in an entity's own common stock
- bReceivables related to the issuance of equity interests and the appropriation of retained earnings
- c
- dConvertible preferred stock, unless the guidance in other Subtopics (such as Subtopic 470-20 on debt with conversion and other options or 480-10 on distinguishing liabilities from equity) requires that the convertible preferred stock be classified as a liability. The relevant guidance in this Subtopic shall be considered after an issuer's determination under Subtopic 815-15 on embedded derivatives of whether an embedded conversion option or other embedded feature in convertible preferred stock should be accounted for separately as a derivative instrument (see paragraph 815-15-55-76B). The guidance in this Subtopic does not apply to convertible preferred stock that is issued as awards to a grantee in exchange for goods or services received (or to be received) that are within the scope of Topic 718 on stock compensation unless the instrument is modified in accordance with and no longer subject to the guidance in that Topic.
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
505-10-65-1The guidance in this Subtopic applies to all of the following instruments and activities:- aTransactions in an entity's own common stock
- bReceivables related to the issuance of equity interests and the appropriation of retained earnings
- c
- dConvertible preferred stock, unless the guidance in other Subtopics (such as Subtopic 470-20 on debt with conversion and other options or 480-10 on distinguishing liabilities from equity) requires that the convertible preferred stock be classified as a liability. The relevant guidance in this Subtopic shall be considered after an issuer's determination under Subtopic 815-15 on embedded derivatives of whether an embedded conversion option or other embedded feature in convertible preferred stock should be accounted for separately as a derivative instrument (see paragraph 815-15-55-76B). The guidance in this Subtopic does not apply to convertible preferred stock that is issued as awards to a grantee in exchange for goods or services received (or to be received) that are within the scope of Topic 718 on stock compensation unless the instrument is modified in accordance with and no longer subject to the guidance in that Topic.
- ePaid-in-kind dividends on preferred stock (see paragraph 505-10-15-3). The guidance on paid-in-kind dividends on preferred stock applies to preferred stock classified as equity, including preferred stock that is classified as temporary equity in accordance with SEC Staff Announcement, Classification and Measurement of Redeemable Securities (see paragraph 480-10-S99-3A).
Paid-in-Kind Dividends on Preferred Stock
505-10-15-3
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
505-10-65-1Paid-in-kind dividends are dividends that an issuer satisfies by either:- aDelivering to the holder additional preferred stock with the same terms as the original preferred stock
- bIncreasing the value of the original preferred stock in accordance with the preferred stock agreement (for example, by increasing the original preferred stock’s liquidation value).
505-10-15-4
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
505-10-65-1The guidance in paragraph 505-10-30-1 shall not apply if:- aThe issuer satisfies the dividend obligation by issuing a variable number of shares of the same preferred stock instrument that has a fixed monetary value. For example, a dividend obligation of $1,000 satisfied by delivering a variable number of shares with a current fair value of $1,000 to preferred shareholders would not be within the scope of the guidance in paragraph 505-10-15-2(e).
- bThe transaction represents a deemed dividend (for example, certain redemptions of preferred stock).
505-10-25Recognition
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505-10-25-1
Additional paid-in capital, however created, shall not be used to relieve income of the current or future years of charges that would otherwise be made to the income statement. See paragraph 852-20-25-2 for an exception to this guidance related to reorganizations.
505-10-25-2
All of the following shall be excluded from the determination of net income or the results of operations under all circumstances:
- a Adjustments or charges or credits resulting from transactions in the entity's own capital stock
- b Transfers to and from accounts properly designated as appropriated retained earnings (see paragraph 505-10-45-3 for what is meant by properly designated as appropriated retained earnings)
- c Adjustments made pursuant to a quasi-reorganization (see Subtopic 852-20 for information concerning quasi-reorganizations).
505-10-25-3
Paragraphs provide guidance on accounting for share-based compensation granted by an investor to employees or nonemployees of an equity method investee that provide goods or services to the investee that are used or consumed in the investee's operations. An investee shall recognize the costs of the share-based payment incurred by the investor on its behalf, and a corresponding capital contribution, as the costs are incurred on its behalf (that is, in the same period(s) as if the investor had paid cash to employees and nonemployees of the investee following the guidance in Topic 718 on stock compensation.
505-10-30Initial Measurement
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Paid-in-Kind Dividends on Preferred Stock
505-10-30-1
Transition date:(P) December 16, 2026; (N) December 16, 2026Transition guidance:
505-10-65-1Paid-in-kind dividends on preferred stock issued to preferred shareholders shall be initially measured on the basis of the paid-in-kind dividend rate stated in the preferred stock agreement. For example, if the preferred stock agreement specifies that paid-in-kind dividends are calculated by multiplying the paid-in-kind dividend rate by the liquidation value of the preferred stock outstanding, an entity should measure the paid-in-kind dividend at that amount. 505-10-35Subsequent Measurement
Source downloaded: .Record version 617bbc72b624. Effective date must be checked in the source.
505-10-35-1
If convertible preferred stock is required to be redeemed once the conversion feature expires, the financial instrument becomes a liability under the guidance in Topic 480 upon expiration of the conversion feature and paragraph 480-10-30-2 requires the issuer to reclassify an instrument that becomes mandatorily redeemable as a liability, measured initially at fair value with a corresponding reduction of equity (no gain or loss is to be recognized). That may entail an adjustment to paid-in capital if, upon reclassification, the fair value of the liability differs from the carrying amount of the previously convertible preferred stock. That financial instrument would be subsequently measured under the provisions of Topic 480.
505-10-45Other Presentation Matters
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505-10-45-1
This Section provides guidance related to whether an entity shall report a note receivable arising from the issuance of equity interests either as a reduction of shareholders' equity or as an asset. Guidance is also provided related to appropriations of retained earnings.
Receivables for Issuance of Equity
505-10-45-2
An entity may receive a note, rather than cash, as a contribution to its equity. The transaction may be a sale of capital stock or a contribution to paid-in capital. Reporting the note as an asset is generally not appropriate, except in very limited circumstances in which there is substantial evidence of ability and intent to pay within a reasonably short period of time, for example, as discussed for public entities in paragraph 210-10-S99-1 (paragraphs 27 through 29), which requires a deduction of the receivable from equity. However, such notes may be recorded as an asset if collected in cash before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25).
Appropriations of Retained Earnings
505-10-45-3
Appropriation of retained earnings is permitted, provided that it is shown within the shareholders' equity section of the balance sheet and is clearly identified as an appropriation of retained earnings.
505-10-45-4
Costs or losses shall not be charged to an appropriation of retained earnings, and no part of the appropriation shall be transferred to income.
505-10-50Disclosure
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505-10-50-1
This Section provides guidance on the disclosure requirements associated with the separate accounts comprising shareholders' equity and the specific outstanding securities issued by an entity.
505-10-50-2
If both financial position and results of operations are presented, disclosure of changes in the separate accounts comprising shareholders' equity (in addition to retained earnings) and of the changes in the number of shares of equity securities during at least the most recent annual fiscal period and any subsequent interim period presented is required to make the financial statements sufficiently informative. Disclosure of such changes may take the form of separate statements or may be made in the basic financial statements or notes thereto.
505-10-50-3
An entity shall explain, in summary form within its financial statements, the pertinent rights and privileges of the various securities outstanding. Examples of information that shall be disclosed are dividend and liquidation preferences, participation rights, call prices and dates, conversion or exercise prices or rates and pertinent dates, sinking-fund requirements, unusual voting rights, and significant terms of contracts to issue additional shares or terms that may change conversion or exercise prices (excluding standard antidilution provisions). An entity shall disclose within its financial statements the number of shares issued upon conversion, exercise, or satisfaction of required conditions during at least the most recent annual fiscal period and any subsequent interim period presented. An entity also shall disclose within the financial statements actual changes to conversion or exercise prices that occur during the reporting period (excluding changes due to standard antidilution provisions).
505-10-50-3A
For a financial instrument with a down round feature that has been triggered during the reporting period and for which an entity has recognized the effect in accordance with paragraph 260-10-25-1, an entity shall disclose the following:
- aThe fact that the feature has been triggered
- bThe value of the effect of the down round feature that has been triggered.
Securities with Preferences
505-10-50-4
An entity that issues preferred stock (or other senior stock) that has a preference in involuntary liquidation considerably in excess of the par or stated value of the shares shall disclose the liquidation preference of the stock (the relationship between the preference in liquidation and the par or stated value of the shares). That disclosure shall be made in the equity section of the statement of financial position in the aggregate, either parenthetically or in short, rather than on a per-share basis or through disclosure in the notes.
Transition date:(P) June 30, 2027; (N) June 30, 2027Transition guidance:
105-10-65-7An entity that issues preferred stock (or other senior stock) that has a preference in involuntary liquidation other than par or stated value of the shares shall disclose the liquidation preference of the stock (the relationship between the preference in liquidation and the par or stated value of the shares). That disclosure shall be made in the equity section of the statement of financial position in the aggregate, either parenthetically or in short, rather than on a per-share basis or through disclosure in the notes. 505-10-50-5
In addition, an entity shall disclose both of the following within its financial statements (either on the face of the statement of financial position or in the notes thereto):
- aThe aggregate or per-share amounts at which preferred stock may be called or is subject to redemption through sinking-fund operations or otherwise
- bThe aggregate and per-share amounts of arrearages in cumulative preferred dividends.
Redeemable Securities
505-10-50-11
An entity that issues redeemable stock shall disclose the amount of redemption requirements, separately by issue or combined, for all issues of capital stock that are redeemable at fixed or determinable prices on fixed or determinable dates in each of the five years following the date of the latest statement of financial position presented.
Convertible Preferred Stock
505-10-50-12
The objective of the disclosure about convertible preferred stock is to provide users of financial statements with:
- aInformation about the terms and features of convertible preferred stock
- bAn understanding of how those instruments have been reported in an entity's statement of financial position and statement of financial performance
- cInformation about events, conditions, and circumstances that can affect how to assess the amount or timing of an entity's future cash flows related to those instruments.
505-10-50-13
To comply with the general disclosure requirements of paragraph 505-10-50-3, an entity shall explain the pertinent rights and privileges of each outstanding instrument, including, but not limited to, the following information:
- aNumber of shares issued and par value
- bDividends
- cConversion or exercise prices or rates and number of shares into which the instrument is potentially convertible
- dPertinent dates, such as conversion date(s)
- eParties that control the conversion rights
- fManner of settlement upon conversion and any alternative settlement methods, such as cash, shares, or a combination of cash and shares
- gTerms that may change conversion or exercise prices, number of shares to be issued, or other conversion rights and the timing of those rights (excluding standard antidilution provisions)
- hLiquidation preference required by paragraph 505-10-50-4 and unusual voting rights
- iOther material terms and features of the instrument that are not listed above.
505-10-50-14
An entity shall provide the following incremental information for contingently convertible instruments or the instruments that are described in paragraphs :
- aEvents or changes in circumstances that would adjust or change the contingency or would cause the contingency to be met
- bInformation on whether the shares that would be issued if the contingently convertible securities were converted are included in the calculation of diluted earnings per share (EPS) and the reasons why or why not
- cOther information that is helpful in understanding both the nature of the contingencies and the potential impact of conversion.
505-10-50-15
An entity shall disclose the amount of dividends declared for each period for which a statement of financial performance is presented, in addition to the disclosures required by paragraph 505-10-50-5.
505-10-50-16
An entity shall disclose the following as of the date of the latest statement of financial position presented:
- aChanges to conversion or exercise prices that occur during the reporting period other than changes due to standard antidilution provisions
- bEvents or changes in circumstances that occur during the reporting period that cause conversion contingencies to be met or conversion terms to be significantly changed
- cThe number of shares issued upon conversion, exercise, or satisfaction of required conditions during the reporting period.
505-10-50-18
An entity shall disclose the following information about derivative transactions entered into in connection with the issuance of convertible preferred stock within the scope of this Subtopic regardless of whether such derivative transactions are accounted for as assets, liabilities, or equity instruments:
- aThe terms of those derivative transactions (including the terms of settlement)
- bHow those derivative transactions relate to the instruments within the scope of this Subtopic
- cThe number of shares underlying the derivative transactions
- dThe reasons for entering into those derivative transactions.
505-10-60Relationships
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Comprehensive Income
505-10-60-1
For guidance on the required presentation and disclosure related to other comprehensive income, see paragraphs .
Debt
505-10-60-3
For guidance on the need to allocate proceeds from the sale of debt with stock purchase warrants to the debt and the warrants, see Subtopic 470-20.
Distinguishing Liabilities from Equity
505-10-60-3A
For guidance on whether a specific financial instrument shall be classified as equity or outside of the equity classification, see Topic 480.
Consolidation
505-10-60-4
For guidance on the treatment of shares of a parent held by its subsidiary in the consolidated balance sheet, see paragraph 810-10-45-5. For guidance on the accounting for the purchase (early extinguishment) of a wholly owned subsidiary's mandatorily redeemable preferred stock, see paragraphs 810-10-40-1 through 40-2A.
Derivatives and Hedging
505-10-60-5
For guidance on the potential classification of an embedded derivative as an equity instrument, see Topic 815.
Financial Instruments
505-10-60-6
For guidance on the accounting for a registration payment arrangement, see Subtopic 825-20.
505-10-60-7
For guidance on the accounting for an equity-classified freestanding financial instrument with a down round feature, see Topic 260 on earnings per share.
505-10-60-8
For guidance on accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange, see Subtopic 815-40 on contracts in entity's own equity.
505-10-65Transition and Open Effective Date Information
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Transition Related to Accounting Standards Update No. 2026-01, <em class="ph i">Equity (Topic 505): Initial Measurement of Paid-in-Kind Dividends on Equity-Classified Preferred Stock</em>
505-10-65-1
The following represents the transition and effective date information related to Accounting Standards Update No. 2026-01, Equity (Topic 505): Initial Measurement of Paid-in-Kind Dividends on Equity-Classified Preferred Stock:
Effective date and early adoption
- aAll entities shall apply the pending content that links to this paragraph for annual reporting periods beginning after December 15, 2026, and interim reporting periods within those annual reporting periods.
- bEarly adoption of the pending content that links to this paragraph is permitted in an interim or annual reporting period in which the financial statements have not yet been issued or made available for issuance. If an entity adopts the pending content that links to this paragraph in an interim reporting period, it shall apply the pending content as of the beginning of the annual reporting period that includes that interim reporting period.
Transition method
- cAn entity shall apply the pending content that links to this paragraph using either of the following transition methods:
- 1On a prospective basis to paid-in-kind dividends recognized on preferred stock on or after the initial application date of the pending content that links to this paragraph.
- 2On a modified retrospective basis through a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate components of equity) as of the beginning of the earliest period presented. Under this transition method, an entity shall apply the pending content that links to this paragraph to paid-in-kind dividends recognized on preferred stock that is outstanding as of the initial application date of the pending content.
- 1
Transition disclosures
- dAn entity that applies the pending content that links to this paragraph prospectively in accordance with (c)(1) shall provide the following transition disclosures in the financial statements of both the interim reporting period (if applicable) and the annual reporting period in which the pending content is applied:
- 1The nature of the change in accounting principle, including an explanation of the newly adopted accounting principle
- 2The method of applying the change.
- 1
- eAn entity that applies the pending content that links to this paragraph on a modified retrospective basis in accordance with (c)(2) shall provide the following transition disclosures in the financial statements of both the interim reporting period (if applicable) and the annual reporting period in which the pending content is applied:
- 1The nature of the change in accounting principle, including an explanation of the newly adopted accounting principle
- 2The method of applying the change
- 3The cumulative effect of the change on retained earnings or other components of equity in the statement of financial position as of the beginning of the earliest period presented
- 4The effect of the change on income available to common shareholders, any other affected financial statement line items, and any affected per-share amounts for the current reporting period and any prior reporting periods retrospectively adjusted.
- 1
505-10-S00StatusSEC
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505-10-S00-1
The following table identifies the changes made to this Subtopic.
| Paragraph | Action | Accounting Standards Update | Date |
| 505-10-S25-2 | Superseded | Accounting Standards Update No. 2012-03 | 08/27/2012 |
| 505-10-S45-10 | Superseded | Accounting Standards Update No. 2012-03 | 08/27/2012 |
| 505-10-S50-4 | Superseded | Accounting Standards Update No. 2012-03 | 08/27/2012 |
| 505-10-S50-5 | Amended | Accounting Standards Update No. 2020-09 | 10/22/2020 |
| 505-10-S50-6 | Amended | Accounting Standards Update No. 2020-09 | 10/22/2020 |
| Superseded | Accounting Standards Update No. 2020-09 | 10/22/2020 | |
| 505-10-S99-1 | Amended | Accounting Standards Update No. 2019-07 | 07/26/2019 |
| 505-10-S99-1 | Amended | Accounting Standards Update No. 2010-21 | 08/02/2010 |
| 505-10-S99-2 | Amended | Accounting Standards Update No. 2019-07 | 07/26/2019 |
| 505-10-S99-6 | Superseded | Accounting Standards Update No. 2010-22 | 08/19/2010 |
| 505-10-S99-7 | Amended | Accounting Standards Update No. 2012-03 | 08/27/2012 |
505-10-S25RecognitionSEC
Source downloaded: .Record version 46f6428cb54f. Effective date must be checked in the source.
Expenses Related to an Equity Offering
505-10-S25-1
See paragraph 340-10-S99-1, SAB Topic 5.A, for SEC Staff views on deferral of expenses related to an equity offering.
505-10-S30Initial MeasurementSEC
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Increasing Rate Preferred Stock
505-10-S30-1
See paragraph 505-10-S99-7, SAB Topic 5.Q., Question 1, for SEC Staff views on increasing rate preferred stock.
505-10-S35Subsequent MeasurementSEC
Source downloaded: .Record version 4df2ded70c46. Effective date must be checked in the source.
Increasing Rate Preferred Stock
505-10-S35-1
See paragraph 505-10-S99-7, SAB Topic 5.Q, Questions 2 and 3, for SEC Staff views on increasing rate preferred stock.
505-10-S45Other Presentation MattersSEC
Source downloaded: .Record version 72cd45abe06a. Effective date must be checked in the source.
Discounts on and Unamortized Balances of Shares
505-10-S45-1
See paragraph 505-10-S99-2, Regulation S-X Rule 4-07, for requirements on presenting discounts on shares and unamortized balances of shares.
Preferred Stock that Is Not Redeemable or Redeemable Solely at the Option of the Issuer
505-10-S45-2
See paragraph 210-10-S99-1, Regulation S-X Rule 5-02.29, for requirements on presenting preferred stock that is not redeemable or redeemable solely at the option of the issuer.
Common Stock
505-10-S45-3
See paragraph 210-10-S99-1, Regulation S-X Rule 5-02.30, for presentation requirements for common stock.
Other Stockholders' Equity
505-10-S45-4
See paragraph 210-10-S99-1, Regulation S-X Rule 5-02.31, for presentation requirements for other stockholders' equity.
Subordinated Debt
505-10-S45-5
See paragraph 470-10-S99-2, SAB Topic 4.A, for SEC Staff views on prohibiting the presentation of subordinated debt within stockholders' equity.
Presentation of S Corporation Undistributed Earnings in Financial Statements upon Termination of S Election
505-10-S45-6
See paragraph 505-10-S99-3, SAB Topic 4.B, for SEC Staff views on presenting S corporation undistributed earnings on the date the S election is terminated.
Receivables Arising from the Issuance of Capital Stock to Officers and Other Employees
505-10-S45-7
See paragraph 310-10-S99-2, SAB Topic 4.E, for SEC Staff views on presenting receivables arising from sales of capital stock to officers and other employees.
Presentation of Equity Section in Limited Partnership Financial Statements
505-10-S45-8
See paragraph 505-10-S99-5, SAB Topic 4.F, for SEC Staff views on presenting equity in limited partnership financial statements.
Presentation of Notes and Other Receivables in a General Partner's Balance Sheet
505-10-S45-9
See paragraph 310-10-S99-3, SAB Topic 4.G, for SEC Staff views on presenting certain notes and other receivables in a general partner's balance sheet.
505-10-S50DisclosureSEC
Source downloaded: .Record version 6fb93939b861. Effective date must be checked in the source.
Changes in Each Caption of Other Stockholders' Equity
505-10-S50-1
See paragraph 505-10-S99-1, Regulation S-X Rule 3-04, for disclosure requirements for changes in stockholders' equity.
Preferred Shares
505-10-S50-2
See paragraph 235-10-S99-1, Regulation S-X Rule 4-08(d), for disclosure requirements for preferred shares.
Restrictions that Limit the Payment of Dividends by the Registrant
505-10-S50-3
See paragraph 235-10-S99-1, Regulation S-X Rule 4-08(e), for disclosure requirements for restrictions that limit the payment of dividends by the registrant.
Guarantors and Issuers of Guaranteed Securities Registered or Being Registered
505-10-S50-5
See paragraph 470-10-S99-1, Regulation S-X Rule 3-10, for requirements applicable to financial statements of guarantors and issuers of guaranteed debt or debt-like securities registered or being registered.
505-10-S50-6
See paragraph 470-10-S99-1A, Regulation S-X Rule 13-01, for disclosure requirements about guarantors and issuers of guaranteed debt or debt-like securities registered or being registered.
505-10-S99SEC MaterialsSEC
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SEC Rules, Regulations, and Interpretations
505-10-S99-1
The following is the text of Regulation S-X Rule 3-04, Changes in Other Stockholders' Equity and Noncontrolling Interests (17 CFR 210.3-04).
- An analysis of the changes in each caption of stockholders' equity and noncontrolling interests presented in the balance sheets shall be given in a note or separate statement. This analysis shall be presented in the form of a reconciliation of the beginning balance to the ending balance for each period for which a statement of comprehensive income is required to be filed with all significant reconciling items described by appropriate captions with contributions from and distributions to owners shown separately. Also, state separately the adjustments to the balance at the beginning of the earliest period presented for items which were retroactively applied to periods prior to that period. With respect to any dividends, state the amount per share and in the aggregate for each class of shares. Provide a separate schedule in the notes to the financial statements that shows the effects of any changes in the registrant's ownership interest in a subsidiary on the equity attributable to the registrant.
- [83 FR 50199, Oct. 4, 2018]
505-10-S99-2
The following is the text of Regulation S-X Rule 4-07, Discount on Shares (17 CFR 210.4-07).
- Discount on shares, or any unamortized balance thereof, shall be shown separately as a deduction from the applicable account(s) as circumstances require.
SEC Staff Guidance
505-10-S99-3
The following is the text of SAB Topic 4.B, S Corporations.
- Facts: An S corporation has undistributed earnings on the date its S election is terminated.
- Question: How should such earnings be reflected in the financial statements?
- Interpretive Response: Such earnings must be included in the financial statements as additional paid-in capital. This assumes a constructive distribution to the owners followed by a contribution to the capital of the corporation.
505-10-S99-4
The following is the text of SAB Topic 4.C, Changes in Capital Structure.
- Facts: A capital structure change to a stock dividend, stock split or reverse split occurs after the date of the latest reported balance sheet but before the release of the financial statements or the effective date of the registration statement, whichever is later.
- Question: What effect must be given to such a change?
- Interpretive Response: Such changes in the capital structure must be given retroactive effect in the balance sheet.
- An appropriately cross-referenced note should disclose the retroactive treatment, explain the change made and state the date the change became effective.
505-10-S99-5
The following is the text of SAB Topic 4.F, Limited Partnerships.
- Facts: There exist a number of publicly held partnerships having one or more corporate or individual general partners and a relatively larger number of limited partners. There are no specific requirements or guidelines relating to the presentation of the partnership equity accounts in the financial statements. In addition, there are many approaches to the parallel problem of relating the results of operations to the two classes of partnership equity interests.
- Question: How should the financial statements of limited partnerships be presented so that the two ownership classes can readily determine their relative participations in both the net assets of the partnership and in the results of its operations?
- Interpretive Response: The equity section of a partnership balance sheet should distinguish between amounts ascribed to each ownership class. The equity attributed to the general partners should be stated separately from the equity of the limited partners, and changes in the number of equity units authorized and outstanding should be shown for each ownership class. A statement of changes in partnership equity for each ownership class should be furnished for each period for which an income statement is included.
- The income statements of partnerships should be presented in a manner which clearly shows the aggregate amount of net income (loss) allocated to the general partners and the aggregate amount allocated to the limited partners. The statement of income should also state the results of operations on a per unit basis.
505-10-S99-7
The following is the text of SAB Topic 5.Q, Increasing Rate Preferred Stock.
- Facts: A registrant issues Class A and Class B nonredeemable preferred stock FN19 on 1/1/X1. Class A, by its terms, will pay no dividends during the years 20X1 through 20X3. Class B, by its terms, will pay dividends at annual rates of $2, $4 and $6 per share in the years 20X1, 20X2 and 20X3, respectively. Beginning in the year 20X4 and thereafter as long as they remain outstanding, each instrument will pay dividends at an annual rate of $8 per share. In all periods, the scheduled dividends are cumulative.
- FN19 "Nonredeemable" preferred stock, as used in this SAB, refers to preferred stocks which are not redeemable or are redeemable only at the option of the issuer.
- At the time of issuance, eight percent per annum was considered to be a market rate for dividend yield on Class A, given its characteristics other than scheduled cash dividend entitlements (voting rights, liquidation preference, etc.), as well as the registrant's financial condition and future economic prospects. Thus, the registrant could have expected to receive proceeds of approximately $100 per share for Class A if the dividend rate of $8 per share (the "perpetual dividend") had been in effect at date of issuance. In consideration of the dividend payment terms, however, Class A was issued for proceeds of $79 3/8 per share. The difference, $20 5/8, approximated the value of the absence of $8 per share dividends annually for three years, discounted at 8%.
- The issuance price of Class B shares was determined by a similar approach, based on the terms and characteristics of the Class B shares.
- Question 1: How should preferred stocks of this general type (referred to as "increasing rate preferred stocks") be reported in the balance sheet?
- Interpretive Response: As is normally the case with other types of securities, increasing rate preferred stock should be recorded initially at its fair value on date of issuance. Thereafter, the carrying amount should be increased periodically as discussed in the Interpretive Response to Question 2.
- Question 2: Is it acceptable to recognize the dividend costs of increasing rate preferred stocks according to their stated dividend schedules?
- Interpretive Response: No. The staff believes that when consideration received for preferred stocks reflects expectations of future dividend streams, as is normally the case with cumulative preferred stocks, any discount due to an absence of dividends (as with Class A) or gradually increasing dividends (as with Class B) for an initial period represents prepaid, unstated dividend cost. FN20 Recognizing the dividend cost of these instruments according to their stated dividend schedules would report Class A as being cost-free, and would report the cost of Class B at less than its effective cost, from the standpoint of common stock interests (i. e., for purposes of computing income applicable to common stock and earnings per common share) during the years 20X1 through 20X3.
- FN20 As described in the "Facts" section of this issue, a registrant would receive less in proceeds for a preferred stock, if the stock were to pay less than its perpetual dividend for some initial period(s), than if it were to pay the perpetual dividend from date of issuance. The staff views the discount on increasing rate preferred stock as equivalent to a prepayment of dividends by the issuer, as though the issuer had concurrently (a) issued the stock with the perpetual dividend being payable from date of issuance, and (b) returned to the investor a portion of the proceeds representing the present value of certain future dividend entitlements which the investor agreed to forgo.
- Accordingly, the staff believes that discounts on increasing rate preferred stock should be amortized over the period(s) preceding commencement of the perpetual dividend, by charging imputed dividend cost against retained earnings and increasing the carrying amount of the preferred stock by a corresponding amount. The discount at time of issuance should be computed as the present value of the difference between (a) dividends that will be payable, if any, in the period(s) preceding commencement of the perpetual dividend; and (b) the perpetual dividend amount for a corresponding number of periods; discounted at a market rate for dividend yield on preferred stocks that are comparable (other than with respect to dividend payment schedules) from an investment standpoint. The amortization in each period should be the amount which, together with any stated dividend for the period (ignoring fluctuations in stated dividend amounts that might result from variable rates, FN21 results in a constant rate of effective cost vis-a-vis the carrying amount of the preferred stock (the market rate that was used to compute the discount).
- FN21 See Question 3 regarding variable increasing rate preferred stocks.
- Simplified (ignoring quarterly calculations) application of this accounting to the Class A preferred stock described in the "Facts" section of this bulletin would produce the following results on a per share basis:
Carrying amount of preferred stock Beginning of Year (BOY) Imputed Dividend (8% of carrying Amount at BOY) "End of year " Year 20X1 $79.38 6.35 85.73 Year 20X2 85.73 6.86 92.59 Year 20X3 92.59 7.41 100.00- During 20X4 and thereafter, the stated dividend of $8 measured against the carrying amount of $100 FN22 would reflect dividend cost of 8%, the market rate at time of issuance.
- FN22 It should be noted that the $100 per share amount used in this issue is for illustrative purposes, and is not intended to imply that application of this issue will necessarily result in the carrying amount of a nonredeemable preferred stock being accreted to its par value, stated value, voluntary redemption value or involuntary liquidation value.
- The staff believes that existing authoritative literature, while not explicitly addressing increasing rate preferred stocks, implicitly calls for the accounting described in this bulletin.
- The pervasive, fundamental principle of accrual accounting would, in the staff's view, preclude registrants from recognizing the dividend cost on the basis of whatever cash payment schedule might be arranged. Furthermore, recognition of the effective cost of unstated rights and privileges is well-established in accounting, and is specifically called for by FASB ASC Subtopic 835-30, Interest—Imputation of Interest, and Topic 3.C of this codification for unstated interest costs of debt capital and unstated dividend costs of redeemable preferred stock capital, respectively. The staff believes that the requirement to recognize the effective periodic cost of capital applies also to nonredeemable preferred stocks because, for that purpose, the distinction between debt capital and preferred equity capital (whether redeemable FN23 or nonredeemable) is irrelevant from the standpoint of common stock interests.
- FN23 Application of the interest method with respect to redeemable preferred stocks pursuant to Topic 3.C results in accounting consistent with the provisions of this bulletin irrespective of whether the redeemable preferred stocks have constant or increasing stated dividend rates. The interest method, as described in FASB ASC Subtopic 835-30, produces a constant effective periodic rate of cost that is comprised of amortization of discount as well as the stated cost in each period.
- Question 3: Would the accounting for discounts on increasing rate preferred stock be affected by variable stated dividend rates?
- Interpretive Response: No. If stated dividends on an increasing rate preferred stock are variable, computations of initial discount and subsequent amortization should be based on the value of the applicable index at date of issuance and should not be affected by subsequent changes in the index.
- For example, assume that a preferred stock issued 1/1/X1 is scheduled to pay dividends at annual rates, applied to the stock's par value, equal to 20% of the actual (fluctuating) market yield on a particular Treasury security in 20X1 and 20X2, and 90% of the fluctuating market yield in 20X3 and thereafter. The discount would be computed as the present value of a two-year dividend stream equal to 70% (90% less 20%) of the 1/1/X1 Treasury security yield, annually, on the stock's par value. The discount would be amortized in years 20X1 and 20X2 so that, together with 20% of the 1/1/X1 Treasury yield on the stock's par value, a constant rate of cost vis-a-vis the stock's carrying amount would result. Changes in the Treasury security yield during 20X1 and 20X2 would, of course, cause the rate of total reported preferred dividend cost (amortization of discount plus cash dividends) in those years to be more or less than the rate indicated by discount amortization plus 20% of the 1/1/X1 Treasury security yield. However, the fluctuations would be due solely to the impact of changes in the index on the stated dividends for those periods.
- Question 4: Will the staff expect retroactive changes by registrants to comply with the accounting described in this bulletin?
- Interpretive Response: All registrants will be expected to follow the accounting described in this bulletin for increasing rate preferred stocks issued after December 4, 1986. FN24 Registrants that have not followed this accounting for increasing rate preferred stocks issued before that date were encouraged to retroactively change their accounting for those preferred stocks in the financial statements next filed with the Commission. The staff did not object if registrants did not make retroactive changes for those preferred stocks, provided that all presentations of and discussions regarding income applicable to common stock and earnings per share in future filings and shareholders' reports are accompanied by equally prominent supplemental disclosures (on the face of the income statement, in presentations of selected financial data, in MD&A, etc.) of the impact of not changing their accounting and an explanation of such impact (e. g., that dividend cost has been recognized on a cash basis).
- FN24 The staff first publicly expressed its view as to the appropriate accounting at the December 3-4, 1986 meeting of the EITF.