Stock Split: Definition, Accounting Treatment, and Financial Reporting

A stock split is a corporate action that increases the number of a company’s outstanding shares by issuing additional shares to existing shareholders, without changing the total value of their holdings.

Although a stock split does not affect total shareholders’ equity, it adjusts the par value (or stated value) and market price per share, making the stock more accessible to a broader base of investors.

Understanding how stock splits are accounted for and disclosed is important for maintaining accurate financial reporting and providing transparency to users of financial statements.

This article explains the concept, accounting treatment, examples, and financial reporting impacts of stock splits, under U.S. GAAP and IFRS.

1. What Is a Stock Split?

A stock split occurs when a company issues additional shares to existing shareholders in proportion to their current holdings.

Key characteristics of stock splits:

✦ No change in total shareholders’ equity

✦ No change in each shareholder’s proportional ownership

✦ Decrease in the par value per share

✦ Decrease in the market price per share

✦ Increase in the number of shares outstanding

Stock splits are often undertaken to:

✦ Improve liquidity of shares

✦ Make shares appear more affordable

✦ Signal management’s confidence in future growth

2. Types of Stock Splits

✦ Forward Stock Split — Increases the number of shares (e.g., 2-for-1, 3-for-1)

✦ Reverse Stock Split — Decreases the number of shares (e.g., 1-for-5, 1-for-10)

Forward stock splits are the most common, aimed at lowering the market price per share.

Reverse stock splits are often used to meet minimum listing requirements or to improve a company's stock image.

3. Accounting for Stock Splits

Under U.S. GAAP and IFRS, a stock split is treated as a memorandum entry:

✦ No journal entry to record a stock split in the general ledger

✦ Only a change in the par value and number of shares authorized, issued, and outstanding

✦ No impact on retained earnings or paid-in capital

If the par value is changed, the company amends its records to reflect:

✦ Reduced par value (forward split)

✦ Increased par value (reverse split)

If no par value exists, only the number of shares changes.

Example – Forward Stock Split (2-for-1):

Before the split:

• 100,000 shares outstanding

• Par value per share = $1

• Total par value = $100,000

After the split:

• 200,000 shares outstanding

• New par value per share = $0.50

• Total par value = still $100,000

Memorandum Entry:

"On [date], the Company effected a 2-for-1 stock split. The par value per share was adjusted from $1.00 to $0.50. The number of shares outstanding doubled, with no change in total shareholders’ equity."

Example – Reverse Stock Split (1-for-5):

Before the split:

• 500,000 shares outstanding

• Par value per share = $1

• Total par value = $500,000

After the split:

• 100,000 shares outstanding

• New par value per share = $5

• Total par value = still $500,000

Again, no journal entry is recorded, but internal records and the articles of incorporation (if required) are updated.

4. Stock Split vs. Stock Dividend

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

✦ A stock split reduces the par value per share and does not affect retained earnings.

✦ A stock dividend maintains par value but reduces retained earnings and increases common stock and APIC.

Summary:

Feature	Stock Split	Stock Dividend
Impact on Retained Earnings	No impact	Reduces retained earnings
Journal Entry	No journal entry	Journal entry required
Par Value per Share	Adjusted proportionally	Remains unchanged
Total Equity	Unchanged	Unchanged

5. Presentation and Disclosure in Financial Statements

Companies disclose stock splits by:

✦ Explaining the terms and date of the stock split

✦ Adjusting all historical share data (shares outstanding, EPS, etc.) retroactively for comparative periods

✦ Providing a note in the financial statements detailing the stock split’s nature and effects

Impact on EPS Presentation:

Earnings per share (EPS) figures for all periods presented must be restated as if the stock split had occurred at the beginning of the earliest period presented.

For example:

✦ If EPS was $3.00 per share before a 2-for-1 split, it becomes $1.50 per share after restatement.

6. Why Companies Conduct Stock Splits

Common reasons for stock splits include:

✦ Improving Marketability: A lower share price often attracts a broader investor base.

✦ Signaling Growth: Management may use a split to signal confidence in strong future performance.

✦ Enhancing Liquidity: More shares outstanding can lead to tighter bid-ask spreads and higher trading volumes.

However, stock splits do not inherently create value — they simply alter the share structure.

7. Accounting for Fractional Shares

In some cases, stock splits result in fractional shares. Companies handle these by:

✦ Paying cash for fractional shares (common practice)

✦ Issuing additional shares to round up to the nearest whole share (less common)

Cash paid for fractional shares is recorded as a reduction of equity.