ASC 505-20
Stock Dividends and Stock Splits
505 Equity
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ASC 505-20 governs how corporations (issuers) and shareholders (recipients) account for stock dividends and stock splits. The core rule is substance over form: a small issuance (generally less than 20–25% of previously outstanding shares) is a stock dividend requiring capitalization of retained earnings at the fair value of the shares issued, while a larger issuance that materially reduces the unit market price is a stock split in substance, requiring capitalization only to the extent of legal requirements. Recipients recognize no income; they simply reallocate the cost of previously held shares over the larger number of shares.
Key points (7)
- A stock dividend or stock split involves no distribution or severance of corporate assets, so any increase in the fair value of a recipient's holdings is unrealized appreciation and is not income (505-20-05-4).
- The Subtopic applies to all corporations but not to distributions of shares of another corporation held as an investment, shares of a different class, rights to subscribe for additional shares, or same-class shares where each shareholder may elect cash or shares (505-20-15-1 through 15-3A).
- Issuances of additional shares of less than 20 or 25 percent of previously outstanding shares generally call for stock dividend treatment; larger issuances that materially reduce unit market price are stock splits in substance (505-20-25-2 through 25-3).
- For a stock dividend, the issuer transfers from retained earnings to capital stock and additional paid-in capital an amount equal to the fair value of the additional shares issued, which usually exceeds state-law minimum capitalization (par value) requirements (505-20-30-3 through 30-4).
- For a stock split — and for stock dividends of closely held entities where shareholders have intimate knowledge of the entity's affairs — retained earnings need be capitalized only to the extent required by law (505-20-30-5 through 30-6).
- A recipient allocates the cost of shares previously held equitably over the total shares held after the dividend or split, and gain or loss on later disposition is measured using the adjusted cost per share (505-20-30-7).
- When a stock dividend in form is a stock split in substance, the word 'dividend' should be avoided; if legal requirements compel its use, the transaction should be described as a 'stock split effected in the form of a dividend' (505-20-50-1).
For students. Exams love the 20–25% threshold: small issuances are stock dividends measured at fair value with a charge to retained earnings, while large ones are splits requiring only legal-minimum (par) capitalization. The common misunderstanding is that a shareholder recognizes dividend income on receipt — there is no income, only a reallocation of existing basis across more shares.
stock dividendstock splitcapitalization of retained earningssubstance over formfair value of shares issuedstock split effected in the form of a dividendcost allocation to shares heldclosely held entity
Machine-generated study aid for ASC 505-20. Check the source paragraphs below.
505-20-00Status
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505-20-00-1
The following table identifies the changes made to this Subtopic.
| Paragraph | Action | Accounting Standards Update | Date |
| Fair Value (3rd def.) | Added | Accounting Standards Update No. 2012-04 | 10/01/2012 |
| Stock Dividend | Amended | Accounting Standards Update No. 2010-01 | 01/05/2010 |
| 505-20-05-2 | Amended | Accounting Standards Update No. 2012-04 | 10/01/2012 |
| 505-20-05-3 | Superseded | Accounting Standards Update No. 2010-01 | 01/05/2010 |
| 505-20-05-4 | Amended | Accounting Standards Update No. 2012-04 | 10/01/2012 |
| 505-20-05-4 | Amended | Accounting Standards Update No. 2010-01 | 01/05/2010 |
| 505-20-15-1 | Amended | Accounting Standards Update No. 2016-19 | 12/14/2016 |
| 505-20-15-2 | Amended | Accounting Standards Update No. 2010-01 | 01/05/2010 |
| 505-20-15-3A | Added | Accounting Standards Update No. 2010-01 | 01/05/2010 |
| 505-20-65-1 | Added | Accounting Standards Update No. 2010-01 | 01/05/2010 |
505-20-05Overview and Background
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505-20-05-1
This Subtopic addresses the accounting for stock dividends and stock splits. It includes guidance for the recipient as well as for the issuer.
505-20-05-2
Many recipients of stock dividends look upon them as distributions of corporate earnings, and usually in an amount equivalent to the fair value of the additional shares received. If the issuances of stock dividends are so small in comparison with the shares previously outstanding, such issuances generally do not have any apparent effect on the share market price and, consequently, the fair value of the shares previously held remains substantially unchanged.
505-20-05-4
If there is an increase in the fair value of a recipient's holdings, such unrealized appreciation is not income. In the case of a stock dividend or stock split, there is no distribution, division, or severance of corporate assets. Moreover, there is nothing resulting therefrom that the shareholder can realize without parting with some of his or her proportionate interest in the corporation.
505-20-05-5
See paragraph 260-10-55-12 for earnings per share (EPS) guidance if the number of common shares outstanding increases as a result of a stock dividend or stock split.
505-20-15Scope and Scope Exceptions
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Entities
505-20-15-1
The guidance in this Subtopic applies to all entities that are corporations.
Transactions
505-20-15-2
The guidance in this Subtopic applies to all stock dividends and stock splits, with specific exceptions noted in paragraphs 505-20-15-3 through 15-3A.
505-20-15-3
The guidance in this Subtopic does not apply to the accounting for a distribution or issuance to shareholders of any of the following:
- a Shares of another corporation held as an investment
- b Shares of a different class
- c Rights to subscribe for additional shares
- d Shares of the same class in cases in which each shareholder is given an election to receive cash or shares.
505-20-15-3A
Item (d) in the preceding paragraph includes, but is not limited to, a distribution having both of the following characteristics:
- a The shareholder has the ability to elect to receive the shareholder's entire distribution in cash or shares of equivalent value.
- b There is a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate.
505-20-25Recognition
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Criteria for Treatment as Stock Dividend or Stock Split
505-20-25-1
This Section provides guidance on determining whether stock dividends and stock splits are to be accounted for in accordance with their actual form or whether their substance requires different accounting.
Stock Dividend in Form
505-20-25-2
The number of additional shares issued as a stock dividend may be so great that it has, or may reasonably be expected to have, the effect of materially reducing the share market value. In such a situation, because the implications and possible shareholder belief discussed in paragraph 505-20-30-3 are not likely to exist, the substance of the transaction is clearly that of a stock split.
505-20-25-3
The point at which the relative size of the additional shares issued becomes large enough to materially influence the unit market price of the stock will vary with individual entities and under differing market conditions and, therefore, no single percentage can be established as a standard for determining when capitalization of retained earnings in excess of legal requirements is called for and when it is not. Except for a few instances, the issuance of additional shares of less than 20 or 25 percent of the number of previously outstanding shares would call for treatment as a stock dividend as described in paragraph 505-20-30-3.
Stock Split in Form
505-20-25-4
A stock split is confined to transactions involving the issuance of shares, without consideration to the corporation, for the purpose of effecting a reduction in the unit market price of shares of the class issued and, therefore, of obtaining wider distribution and improved marketability of the shares.
505-20-25-5
Few cases will arise in which the aforementioned purpose can be accomplished through an issuance of shares that is less than 20 or 25 percent of the previously outstanding shares.
505-20-25-6
The corporation's representations to its shareholders as to the nature of the issuance is one of the principal considerations in determining whether it shall be recorded as a stock dividend or a stock split. Nevertheless, the issuance of new shares in ratios of less than 20 or 25 percent of the previously outstanding shares, or the frequent recurrence of issuances of shares, would destroy the presumption that transactions represented to be stock splits shall be recorded as stock splits.
505-20-30Initial Measurement
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505-20-30-1
This Section provides guidance for the issuer and recipient of either a stock dividend or a stock split.
Issuer's Accounting for a Stock Dividend or Stock Split
505-20-30-2
Section 505-20-25 provides guidance on determining whether a stock dividend or a stock split shall be accounted for according to its form or whether it shall be accounted for differently. The following guidance addresses the accounting for the substantive nature of the transaction as either a stock dividend or a stock split.
505-20-30-3
In accounting for a stock dividend, the corporation shall transfer from retained earnings to the category of capital stock and additional paid-in capital an amount equal to the fair value of the additional shares issued. Unless this is done, the amount of earnings that the shareholder may believe to have been distributed to him or her will be left, except to the extent otherwise dictated by legal requirements, in retained earnings subject to possible further similar stock issuances or cash distributions.
505-20-30-4
The accounting required in the preceding paragraph will likely result in the capitalization of retained earnings in an amount in excess of that called for by the laws of the state of incorporation; such laws generally require the capitalization only of the par value of the shares issued, or, in the case of shares without par value, an amount usually within the discretion of the board of directors. However, these legal requirements are, in effect, minimum requirements and do not prevent the capitalization of a larger amount per share.
505-20-30-5
In cases of closely held entities, it is presumed that the intimate knowledge of the corporations' affairs possessed by their shareholders would preclude any implications and possible shareholder belief as are referred to in paragraph 505-20-30-3. In such cases, there is no need to capitalize retained earnings other than to meet legal requirements.
505-20-30-6
In the case of a stock split, there is no need to capitalize retained earnings, other than to the extent occasioned by legal requirements.
Recipient's Accounting for a Stock Dividend or Stock Split
505-20-30-7
A shareholder's interest in the corporation remains unchanged by a stock dividend or stock split except as to the number of share units constituting such interest. Therefore, the cost of the shares previously held shall be allocated equitably to the total shares held after receipt of the stock dividend or stock split. When any shares are later disposed of, a gain or loss shall be determined on the basis of the adjusted cost per share.
505-20-50Disclosure
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505-20-50-1
Paragraph 505-20-25-2 identifies a situation in which a stock dividend in form is a stock split in substance. In such instances every effort shall be made to avoid the use of the word dividend in related corporate resolutions, notices, and announcements and that, in those cases in which because of legal requirements this cannot be done, the transaction be described, for example, as a stock split effected in the form of a dividend.
505-20-65Transition and Open Effective Date Information
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505-20-65-1
Paragraph superseded on 07/01/2010 after the end of the transition period stated in Accounting Standards Update No. 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash.
505-20-S25RecognitionSEC
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Accounting for Dividends Declared by a Subsidiary After Balance Sheet Date
505-20-S25-1
See paragraph 855-10-S99-1, SAB Topic 1.B, Question 3, for SEC Staff views on accounting for dividends declared by a subsidiary after the balance sheet date.
Capital Structure Change After the Latest Balance Sheet but Before the Release of the Financial Statements
505-20-S25-2
See paragraph 505-10-S99-4, SAB Topic 4.C, for SEC Staff views on accounting for a change in capital structure after the latest balance sheet but before the release of the financial statements.
Issuance of "Free Distributions" By Japanese Companies
505-20-S25-3
See paragraph 505-20-S99-1, SAB Topic 1.D.2, for SEC Staff views on accounting for the issuance of "free distributions" of common stock by Japanese companies.
505-20-S50DisclosureSEC
Source downloaded: .Record version 945bfc404b77. Effective date must be checked in the source.
Accounting for Dividends Declared After Balance Sheet Date
505-20-S50-1
See paragraph 855-10-S99-1, SAB Topic 1.B.3, for SEC Staff views on disclosures pertaining to dividends declared after the balance sheet date.
Capital Structure Change After the Latest Balance Sheet but Before the Release of the Financial Statements
505-20-S50-2
See paragraph 505-10-S99-4, SAB Topic 4.C, for SEC Staff views on disclosures pertaining to a capital structure change after the latest balance sheet but before the release of the financial statements.
Issuance of "Free Distributions" by Japanese Companies
505-20-S50-3
See paragraph 505-20-S99-1, SAB Topic 1.D.2, for SEC Staff views on disclosures pertaining to the issuance of "free distributions" by Japanese companies.
505-20-S99SEC MaterialsSEC
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SEC Staff Guidance
505-20-S99-1
The following is the text of SAB Topic 1.D.2, "Free Distributions" by Japanese Companies.
- Facts: It is the general practice in Japan for corporations to issue "free distributions" of common stock to existing shareholders in conjunction with offerings of common stock so that such offerings may be made at less than market. These free distributions usually are from 5 to 10 percent of outstanding stock and are accounted for in accordance with provisions of the Commercial Code of Japan by a transfer of the par value of the stock distributed from paid-in capital to the common stock account. Similar distributions are sometimes made at times other than when offering new stock and are also designated "free distributions." U.S. accounting practice would require that the fair value of such shares, if issued by U.S. companies, be transferred from retained earnings to the appropriate capital accounts.
- Question: Should the financial statements of Japanese corporations included in Commission filings which are stated to be prepared in accordance with U.S. GAAP be adjusted to account for stock distributions of less than 25 percent of outstanding stock by transferring the fair value of such stock from retained earnings to appropriate capital accounts?
- Interpretive Response: If registrants and their independent accountants believe that the institutional and economic environment in Japan with respect to the registrant is sufficiently different that U.S. accounting principles for stock dividends should not apply to free distributions, the staff will not object to such distributions being accounted for at par value in accordance with Japanese practice.
- If such financial statements are identified as being prepared in accordance with U.S. GAAP, then there should be footnote disclosure of the method being used which indicates that U.S. companies issuing shares in comparable amounts would be required to account for them as stock dividends, and including in such disclosure the fair value of any such shares issued during the year and the cumulative amount (either in an aggregate figure or a listing of the amounts by year) of the fair value of shares issued over time.