Stock Dividend: Recognition, Measurement, and Financial Reporting

Stock dividends represent a distribution of a company's own shares to existing shareholders, rather than paying a cash dividend. Although no cash leaves the company, stock dividends increase the number of shares outstanding, adjusting ownership percentages while typically preserving total shareholder value.

Accounting for stock dividends requires careful attention to recognition criteria, valuation based on market price, and appropriate equity account adjustments without affecting total equity.

This article explains how stock dividends are recognized, measured, and reported under U.S. GAAP and IFRS, supported by clear examples and journal entries.

1. What Is a Stock Dividend?

A stock dividend is a pro rata distribution of additional shares to shareholders, typically expressed as a percentage of shares owned.

Key points:

✦ Shareholders receive more shares, but retain the same proportional ownership

✦ Total shareholder equity remains unchanged

✦ The market price per share usually decreases proportionally after distribution

Stock dividends are often used to:

✦ Reward shareholders without using cash

✦ Signal confidence in future earnings

✦ Adjust the stock price to maintain accessibility

2. Types of Stock Dividends

✦ Small Stock Dividend – typically less than 20–25% of outstanding shares

✦ Large Stock Dividend – more than 20–25% of outstanding shares

The classification affects how the dividend is accounted for:

✦ Small stock dividends are recorded at fair market value

✦ Large stock dividends are recorded at par value (or stated value)

3. Recognition and Measurement

The stock dividend is recognized by:

✦ Reducing retained earnings

✦ Increasing common stock and potentially additional paid-in capital (APIC)

No asset or liability is created. It is purely an equity reclassification.

Small Stock Dividend (Fair Value Method):

Amount transferred =

Number of new shares × Fair market value per share

Large Stock Dividend (Par Value Method):

Amount transferred =

Number of new shares × Par value per share

4. Example – Small Stock Dividend

Scenario:

• Outstanding shares: 100,000

• Par value per share: $1

• Market value per share: $20

• Company declares a 10% stock dividend (10,000 new shares)

Calculation:

✦ Fair value of dividend = 10,000 × $20 = $200,000

Journal Entry:

Debit: Retained Earnings – $200,000

Credit: Common Stock – $10,000

Credit: Additional Paid-In Capital – $190,000

Explanation:

✦ Common stock increases by par value ($1 × 10,000 shares)

✦ APIC increases by the excess of fair value over par ($19 × 10,000 shares)

5. Example – Large Stock Dividend

Scenario:

• Outstanding shares: 1,000,000

• Par value per share: $1

• Company declares a 30% stock dividend (300,000 new shares)

Calculation:

✦ Amount transferred = 300,000 × $1 = $300,000

Journal Entry:

Debit: Retained Earnings – $300,000

Credit: Common Stock – $300,000

Explanation:

✦ Only par value is used for recording

✦ No entry to APIC unless stated otherwise

6. Stock Dividends vs. Stock Splits

While both increase the number of shares outstanding, they differ fundamentally:

In a stock split, par value per share changes, while in a stock dividend, par value remains the same.

7. Presentation in Financial Statements

• Disclosed in the statement of changes in equity

• Disclosed in the notes to financial statements with:

  ✦ Nature and terms of the stock dividend

  ✦ Impact on number of shares outstanding

  ✦ Effect on earnings per share (EPS)

EPS must be restated retroactively for stock dividends when presented comparatively.

8. IFRS vs. U.S. GAAP Treatment

Both frameworks focus on economic substance rather than just form.

9. Financial Impact of Stock Dividends

Although stock dividends:

✦ Do not change total assets or total equity

✦ Dilute EPS due to increased shares

✦ May signal management confidence in future profitability

✦ Affect stock price proportionally (generally falling slightly)