Stock Split Overview
A company may issue additional shares to its shareholders, which is called a stock dividend. This type of dividend does not involve the reduction of any company assets (since no cash is being paid out), nor does it increase the cash inflow to the recipient. For these reasons, a stock dividend can be considered a neutral event that has no impact on either the issuer or the recipient. However, the sheer volume of shares issued can have an effect on the value of the shareholdings of the recipient, which calls for different types of accounting.
The two volume-based accounting treatments for stock splits are:
- Low-volume stock issuance. If a stock issuance is for less than 20% to 25% of the number of shares outstanding prior to the issuance, account for the transaction as a stock dividend.
- High-volume stock issuance. If a stock issuance is for more than 20% to 25% of the number of shares outstanding prior to the issuance, account for the transaction as a stock split.
The dividing line between these two treatments is an estimate provided in GAAP (one of the major accounting frameworks), based on the assumption that a relatively small stock issuance will not appreciably alter the market price of a share, which therefore creates value for the recipient of these shares. A larger share issuance is presumed to reduce the market price of shares outstanding, so that share recipients do not experience a net increase in the value of their shares.
If there are an ongoing series of smaller stock issuances that would individually be accounted for as stock dividends, consider aggregating these issuances to see if the result would instead trigger treatment as a stock split.
When a stock issuance is sufficiently large to be classified as a stock split, the only accounting is to ensure that the legally-required amount of par value has been properly designated as such in the accounting records. If a company’s stock has no par value, then no reallocation of funds into the par value account is required.
Stock Split Example
Davidson Motors declares a stock dividend to its shareholders of 1,000,000 shares, which represents a doubling of the prior number of shares outstanding. Davidson’s stock has a par value of $1, so the controller records the following entry to ensure that the correct amount of capital is apportioned to the par value account:
|Additional paid-in capital||1,000,000|
|Common stock, $1 par value||1,000,000|