Dividends are distributions to owners or stockholders. They may be paid in cash, stock, or as dividends in kind. See FG 4.4 for accounting for dividends.
Cash dividends declared are generally reported as a deduction from retained earnings. As depicted in Figure FSP 5-1, dividends declared or paid are normally presented in the statement of stockholders' equity at the amount per share, and in total for each class of shares as required by S-X 3-04. In the absence of retained earnings, cash dividends should generally be charged to APIC. This treatment is supported by analogy to SAB Topic 3.C (codified in ASC 480-10-S99-2), which requires accretion of redeemable preferred stock to be charged to APIC in the absence of retained earnings.
A parent company may declare a dividend from other than its accumulated earnings (e.g., from APIC, unrecorded increases in value of the company, or retained earnings resulting from parent's equity in undistributed earnings of a subsidiary). Laws in many jurisdictions have restrictions on declaring dividends from other than a reporting entity's accumulated profits. Accordingly, whenever dividends are declared from other than a parent company's retained earnings, the reporting entity should consider obtaining an opinion of counsel as to the legality of the declaration. A reporting entity may also wish to record a dividend as an addition to accumulated deficit. The legal character of a dividend as a charge to accumulated deficit instead of APIC may be followed for accounting purposes when the dividend is not a legal return of capital.
ASC 505-20-20 defines a stock dividend as a dividend paid in the reporting entity's own shares. Like cash dividends, stock dividends declared are generally shown as a deduction from retained earnings and added to common stock and APIC ("permanent equity"). Unless this is done, the amount of earnings distributed will remain in retained earnings, leading stockholders to believe these distributions are available for further stock issuances or cash distributions. Therefore, the transfer from retained earnings should not be shown as an appropriation of retained earnings, but as a true deduction from retained earnings.
Stock dividends declared or paid are normally presented in the statement of stockholders' equity at the amount per share and in total for each class of shares as required by S-X 3-04. In the year declared, the reporting entity should disclose the amount of retained earnings transferred to permanent equity.
Further, as noted in FSP 5.5, S-X 5-02 requires disclosure of the number of shares issued and outstanding on the face of the balance sheet. When a stock dividend has been declared, but not issued at the balance sheet date, the sum of the number of shares declared as a stock dividend and the total number of shares outstanding should usually be disclosed on the face of the balance sheet. When there are multiple classes of shares, it may be appropriate to disclose this information in the footnotes.
Figure FSP 5-4 illustrates two versions of this presentation on the balance sheet.Figure FSP 5-4
Example balance sheet presentation — shares declared as a stock dividend and not issued
Common stock — $10 par; authorized 200,000 shares; issued and outstanding 105,000 shares (including 5,000 shares declared as a stock dividend on December 29, 20X1, and issued on January 15, 20X2)
December 31, 20X1 Shares Amount Common stock — $10 par; authorized 200,000 shares Issued and outstanding 100,000 shares Issued on January 15, 20X2 as a stock dividend 5,000 shares 105,000 sharesReporting entities may elect not to record a declared stock dividend and related per share effects if there is a reasonable basis for concluding that the dividend may be rescinded. Such a situation might exist when stockholder approval is required and scheduled for a date subsequent to issuance of the financial statements, and there are reasonable grounds to believe that stockholders will not approve the dividend. The reporting entity should disclose such a situation in the footnotes.
If a balance sheet date falls between declaration and issuance of a stock dividend, the reporting entity should show the credit in stockholders’ equity on the balance sheet. The account is not shown as a liability because no corporate obligation is created by the declaration of a stock dividend (and the future payment of the stock dividend would not meet the definition of a liability under ASC 480). As such, reporting entities should not use the caption “stock dividend payable” because it may cause the reader to think of the item as a liability.
We believe an appropriate presentation is a charge to retained earnings for the fair value of the stock dividend with an offsetting credit allocating the amount of the dividend between the capital stock account (at par or at stated value) and APIC in the same manner as would be done if the dividend were issued before the balance sheet date. This treatment eliminates any possible misinterpretation of the nature of the credit or its eventual disposition. We do not believe showing the credit as appropriated retained earnings or as a separate equity item, instead of being included in common stock and APIC, would adequately identify the amount as part of permanent equity.