8.2 Shareholder Distributions

8.2.1 Stock Dividends and Stock Splits

ASC 260-10

Stock Dividends or Stock Splits

55-12 If the number of common shares outstanding increases as a result of a stock dividend or stock split (see Subtopic 505-20) or decreases as a result of a reverse stock split, the computations of basic and diluted EPS shall be adjusted retroactively for all periods presented to reflect that change in capital structure. If changes in common stock resulting from stock dividends, stock splits, or reverse stock splits occur after the close of the period but before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25), the per-share computations for those and any prior-period financial statements presented shall be based on the new number of shares. If per-share computations reflect such changes in the number of shares, that fact shall be disclosed.

Stock splits and reverse stock splits affect the number of common shares outstanding as well as the per-share price of an entity’s common shares, and entities generally enter into such transactions when they wish to manage the per-share price of their common stock. However, stock splits and reverse stock splits themselves have no immediate impact on an entity’s total market capitalization.

ASC 505-20-20 defines a “stock split” as follows:

An issuance by a corporation of its own common shares to its common shareholders without consideration and under conditions indicating that such action is prompted mainly by a desire to increase the number of outstanding shares for the purpose of effecting a reduction in their unit market price and, thereby, of obtaining wider distribution and improved marketability of the shares. Sometimes called a stock split-up.

A reverse stock split is merely the inverse of a stock split. In a reverse stock split, an entity reduces, instead of increases, the total number of shares of common stock outstanding by dividing the current quantity of outstanding shares by the amount of the split (e.g., in a 1-for-10 reverse stock split for an entity with 10 million outstanding common shares, the reverse stock split reduces the number of outstanding shares to 1 million). A transaction that either increases or reduces the total number of common shares outstanding can be a stock split or reverse stock split only if the change is made proportionately to all shareholders. As discussed in Section 8.6.2, certain reclassifications of common equity that occur in conjunction with an IPO are accounted for in the same manner as a stock split or reverse stock split.

Stock dividends may be thought of as having some of the characteristics of a cash dividend but are treated as a stock split for EPS purposes. ASC 505-20-15-3 states that the following types of distributions or issuances to shareholders should not be considered stock dividends:

Shares of another corporation held as an investment
Shares of a different class
Rights to subscribe for additional shares [see Section 8.2.2]
Shares of the same class in cases in which each shareholder is given an election to receive cash or shares [see Section 8.3.3].

For stock dividends, stock splits, and reverse stock splits, ASC 260-10-55-12 requires entities to retrospectively adjust previously reported EPS amounts and to provide appropriate disclosures about this matter (see Section 9.2.1.3). One often-overlooked provision of ASC 260 is the requirement for entities to make this retrospective adjustment when there are changes in the number of outstanding shares of common stock resulting from stock dividends, stock splits, or reverse stock splits that occur after the close of the period but before the financial statements are issued or are available to be issued. Post-balance-sheet stock dividends and stock splits are discussed in Section 8.2.1.1.

Since stock dividends, stock splits, and reverse stock splits have the same proportionate impact on both the number of outstanding common shares and the share price, an entity that is making such retrospective adjustments to EPS will typically not be required to perform detailed recalculations of the impact of potential common shares on diluted EPS or to reallocate undistributed earnings under the two-class method, provided that the entity has standard antidilution provisions in all of its contracts that represent potential common shares. In other words, the impact on previously reported basic and diluted EPS will be reflected through a mere proportionate change in the denominators in the EPS calculations. The example below illustrates this point.

Example 8-1

Impact of Stock Split on EPS

Entity X has a capital structure consisting of outstanding common stock, outstanding preferred stock classified in permanent equity, equity-classified unvested stock awards granted to employees that are considered participating securities, and equity-classified stock options granted to employees that are not considered participating securities. Both the unvested stock awards and the stock options contain standard antidilution provisions that would be applicable in the event of a stock split. For diluted EPS presented for all periods, X has concluded that the unvested share awards are more dilutive under the two-class method than they are under the treasury stock method. Entity X previously reported basic and diluted EPS for the three years in the period ended December 31, 20X8, as follows (all amounts are in millions):

During 20X9, Entity X declares and executes a 2-for-1 stock split. The EPS amounts for the previously reported periods, as retrospectively adjusted for the stock split, are as follows:

On the basis of the facts in this scenario, the stock split has no impact on the numerator. Since the stock split results in a retrospective adjustment to both the outstanding share amounts and the stock price, it also results in an increase to the denominator by a factor of 2 and a decrease in reported EPS by a factor of 0.5 (subject to rounding).

Connecting the Dots

If an entity effectuates a stock dividend, stock split, or reverse stock split and does not have standard antidilution provisions in all of its contracts that represent potential common stock, the holders of the potential common stock, unlike holders of common stock, are positively or adversely affected by the transaction. In these situations, the entity would need to perform detailed recalculations of basic and diluted EPS to appropriately reflect the impact that the stock dividend, stock split, or reverse stock split had on the dilutive effect of potential common stock and the allocation of undistributed earnings under the two-class method.

8.2.1.1 Post-Balance-Sheet Stock Dividends and Stock Splits

If a stock dividend, stock split, or reverse stock split is consummated after the close of the financial reporting period but before the financial statements are issued or available to be issued, the per-share amounts for EPS calculations related to prior periods and the current period must be retrospectively adjusted on the basis of the new number of shares of common stock. In applying this guidance, an entity must consider what constitutes the (1) issuance of financial statements (or those that are available to be issued) and (2) consummation of a post-balance-sheet stock dividend, stock split, or reverse stock split. Such considerations are relevant because an entity would not retrospectively reflect the impact of a post-balance-sheet stock dividend, stock split, or reverse stock split unless it is consummated before the entity’s financial statements are issued or available to be issued.

8.2.1.1.1 Financial Statements Are Issued or Available to Be Issued

ASC 855-10-25-1A and 25-2 state that an SEC filer (or a conduit bond obligor for conduit debt securities that are traded in a public market) should evaluate subsequent events through the date on which financial statements are issued and that all other entities should evaluate subsequent events through the date on which financial statements are available to be issued. These defined terms are relevant to the evaluation of the accounting consequences of a stock dividend, stock split, or reverse stock split that occurs after the date of the financial statements.

In addition, the SEC has provided guidance on assessing when the financial statements of an SEC registrant have been “issued.” Specifically, ASC 855-10-S99-2 states, in part:

Generally, the [SEC] staff believes that financial statements are “issued” as of the date they are distributed for general use and reliance in a form and format that complies with generally accepted accounting principles (GAAP) and, in the case of annual financial statements, that contain an audit report that indicates that the auditors have complied with generally accepted auditing standards (GAAS) in completing their audit. Issuance of financial statements then would generally be the earlier of when the annual or quarterly financial statements are widely distributed to all shareholders and other financial statement usersFN4 or filed with the Commission. Furthermore, the issuance of an earnings release does not constitute issuance of financial statements because the earnings release would not be in a form and format that complies with GAAP and GAAS.

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FN4 Posting financial statements to a registrant’s web site would be considered wide distribution to all shareholders and other financial statement users if the registrant uses its web site to disclose information to the public in a manner consistent with the requirements of Regulation FD. See the Commission’s interpretive guidance in Exchange Act Release No. 58288 (Aug. 7, 2008).

SEC Considerations

On the basis of the SEC’s guidance in ASC 855-10-S99-2 and the practices of SEC registrants, an entity’s annual financial statements are not considered “issued” until the entity has filed a Form 10-K, since press releases are not in a form and format that complies with GAAP and GAAS and entities generally do not disseminate annual reports to shareholders with an audit report that complies with PCAOB standards before filing the Form 10-K. With respect to quarterly financial information, on the basis of the practices of SEC registrants, interim financial statements are also not typically considered “issued” until a Form 10-Q has been filed. However, because an SEC registrant’s quarterly financial statements must be reviewed by an independent registered public accounting firm before being filed on a Form 10-Q but the Form 10-Q does not need to include an independent accountant’s review report indicating the completion of a review in accordance with PCAOB standards, it is possible that an entity’s interim financial statements could be considered “issued” before the Form 10-Q is filed. For quarterly financial statements to be considered “issued” before the filing of the Form 10-Q, an entity must have widely disseminated the required quarterly financial statements and disclosures (i.e., balance sheets, income statements, cash flow statements, and all the disclosures that will be included in the Form 10-Q) in a form and format that complies with GAAP. In practice, these conditions are not met through issuance of a press release and are typically also not met through other forms of dissemination before the date on which the Form 10-Q has been filed.

The common practices of entities not to disseminate the information necessary for “issuance” of financial statements to occur before the filing of Form 10-K or Form 10-Q exist, in part, because of Rules 10b-5 and 12b-20 of the Exchange Act, which specify that financial statements must not be misleading as of the date on which they are filed with the SEC.

8.2.1.1.2 Consummation of Stock Dividend, Stock Split, or Reverse Stock Split

A stock dividend, stock split, or reverse stock split is considered to have been consummated once (1) it has been declared, approved by all necessary parties (e.g., board of directors, shareholders), and distributed and (2) the common shares are trading on a post-split or post-dividend basis. EPS should not be retrospectively adjusted as a result of a stock dividend, stock split, or reverse stock split if the common shares do not trade on a post-split or post-dividend basis until after the financial statements are issued (or, for non-SEC filers, available to be issued). For larger distributions, this typically occurs the day after the dividend or split has been distributed. If an entity has declared a stock dividend, stock split, or reverse stock split before its financial statements are issued (or, for non-SEC filers, available to be issued), but the common shares do not trade on a post-split or post-dividend basis until afterwards, EPS should be calculated for all periods by using the number of common shares on a pre-split basis and the entity should disclose the post-split impact of the stock dividend, stock split, or reverse stock split in the financial statements. The entity should also disclose the significant terms and timing of the pending stock dividend, stock split, or reverse stock split. See Section 9.2.1.3 for further discussion of presentation and disclosure.

Connecting the Dots

An entity is encouraged to consult with its independent accountants when it believes that it should not reflect the impact of a stock dividend, stock split, or reverse stock split in its financial statements to be filed on Form 10-K or Form 10-Q and its common stock is trading on a post-split basis as of the date of the filing of the Form 10-K or Form 10-Q.

8.2.1.1.3 Reissuances of Financial Statements

An entity may reissue its financial statements for various reasons (e.g., to correct an error in previously reported financial statements).1 In addition, financial statements that were previously issued or available to be issued may be included, or incorporated by reference, in a registration statement filed with the SEC. The evaluation of subsequent events pertaining to financial statements that will be included, or incorporated by reference, in a registration stated filed with the SEC is subject to the SEC’s guidance. According to the SEC’s guidance, when financial statements are included, or incorporated by reference, in a registration statement, the entity may need to adjust the financial statements, or provide supplemental disclosures, as a result of certain events occurring after the date on which the financial statements were originally issued or available to be issued. Those events include, but are not limited to, a change in accounting principle; change in reportable segments; discontinued operation; and stock dividend, stock split, or reverse stock split that is consummated or declared after the financial statements were originally issued or available to be issued.

8.2.1.1.3.1 Non-SEC Filers

ASC 855-10

Revised Financial Statements

50-4 Unless the entity is an SEC filer, an entity shall disclose in the revised financial statements the dates through which subsequent events have been evaluated in both of the following:

The issued or available-to-be-issued financial statements
The revised financial statements.

50-5 Revised financial statements are considered reissued financial statements. For guidance on the recognition of subsequent events in reissued financial statements, see paragraph 855-10-25-4.

For a non-SEC filer, stock dividends, stock splits, or reverse stock splits that have been consummated after the date on which financial statements were originally available to be issued generally should be reflected retrospectively in the entity’s financial statements if they are subsequently considered revised financial statements. This guidance is consistent with that in ASC 855, which indicates that revised financial statements are considered reissued financial statements.

The financial statements of a non-SEC filer may be reissued for various reasons.2 For example, a non-SEC filer’s financial statements may be included in a filing with the SEC because the entity is acquired by an SEC registrant or is a significant equity method investee of an investor that is an SEC registrant. An entity could also file a registration statement with the SEC for an initial offering of securities. Various facts and circumstances may be relevant to a non-SEC filer’s inclusion of financial statements in a registration statement or other filing with the SEC. Such an entity should consult with its independent accountants regarding the appropriate presentation and disclosure for a stock dividend, stock split, or reverse stock split that has been consummated or declared after the original date on which the financial statements were available to be issued. As noted below, when financial statements are included (i.e., reproduced) in a registration statement filed with the SEC, such financial statements must generally be retrospectively adjusted to reflect a stock dividend, stock split, or reverse stock split that occurred after the original date on which the financial statements were available to be issued.

8.2.1.1.3.2 SEC Filers

An SEC filer must consider the SEC’s guidance when determining whether its financial statements are “reissued.” Although the application of that guidance will depend on an entity’s particular facts and circumstances, the following are a few considerations:

Section 13500 of the FRM indicates that the SEC staff would ordinarily “not require retrospective revision of previously filed financial statements that are incorporated by reference into a registration or proxy statement for reasons solely attributable to a stock split.” Further, Section 13500 notes that “[i]nstead, the registration or proxy statement may include selected financial data that includes relevant per share information for all periods, with the stock split prominently disclosed.” While this guidance refers only to stock splits, it would apply equally to a stock dividend or reverse stock split that must be retrospectively adjusted under ASC 260. Note that this view of the staff typically only applies when financial statements are incorporated by reference into a registration statement or proxy statement; an SEC registrant would generally be expected to retrospectively revise historical financial statements for a stock split, stock dividend, or reverse stock split when financial statements are included (i.e., reproduced) in a registration statement or proxy statement.
When an SEC registrant retrospectively adjusts previously issued financial statements as a result of the correction of an error or a retrospective accounting change, including, but not limited to, a change in reportable segments or a discontinued operation, any stock dividend, stock split, or reverse stock split that has been consummated since the original issuance of the financial statements should be retrospectively adjusted in the entity’s financial statements and appropriate disclosures should be provided before reissuance.

8.2.2 Rights Issues

ASC 260-10

Rights Issues

55-13 A rights issue whose exercise price at issuance is less than the fair value of the stock contains a bonus element that is somewhat similar to a stock dividend. If a rights issue contains a bonus element and the rights issue is offered to all existing stockholders, basic and diluted EPS shall be adjusted retroactively for the bonus element for all periods presented. If the ability to exercise the rights issue is contingent on some event other than the passage of time, the provisions of this paragraph shall not be applicable until that contingency is resolved.

55-14 The number of common shares used in computing basic and diluted EPS for all periods prior to the rights issue shall be the number of common shares outstanding immediately prior to the issue multiplied by the following factor: (fair value per share immediately prior to the exercise of the rights)/(theoretical ex-rights fair value per share). Theoretical ex-rights fair value per share shall be computed by adding the aggregate fair value of the shares immediately prior to the exercise of the rights to the proceeds expected from the exercise of the rights and dividing by the number of shares outstanding after the exercise of the rights. Example 5 (see paragraph 260-10-55-60) illustrates that provision. If the rights themselves are to be publicly traded separately from the shares prior to the exercise date, fair value for the purposes of this computation shall be established at the close of the last day on which the shares are traded together with the rights.

A rights issue represents an offer to existing common stockholders to purchase additional shares of common stock for a specified amount for a given period. The purchase price is generally less than the fair value of the entity’s common stock. An entity may have a rights issue for various reasons, such as raising additional capital or preventing a takeover. Further, a rights issue:

Is effectively a dividend to existing common stockholders that allows them to subscribe to purchase additional shares of common stock.
Offsets dilution to an entity’s existing shareholders and may be favorable to entities for income tax reasons and because stock exchanges may not require the entity’s common shareholders to approve certain rights issuances.
May be executed through an underwriting by a broker-dealer.

A rights issue may contain a bonus element that is akin to a stock dividend. That element must be treated in the same manner as a stock dividend. Therefore, when a rights issue is offered “in the money,” basic and diluted EPS should be retrospectively adjusted for the portion of the issuance that reflects a stock dividend (see Section 8.2.1). ASC 260-10-55-60 and 55-61 illustrate the impact on EPS for a rights issue that contains a bonus element. (Note that a rights issue whose exercise is contingent upon the occurrence of a specified event other than the mere passage of time would not be recognized for accounting purposes until the contingency is resolved.)

ASC 260-10

Example 5: Rights Issues

55-60 This Example illustrates the provisions for stock rights issues that contain a bonus element as described in paragraphs 260-10-55-13 through 55-14. This Example has the following assumptions:

Net income was $1,100 for the year ended December 31, 20X0.
500 common shares were outstanding for the entire year ended December 31, 20X0.
A rights issue was offered to all existing shareholders in January 20X1. The last date to exercise the rights was March 1, 20X1. The offer provided 1 common share for each 5 outstanding common shares (100 new shares).
The exercise price for the rights issue was $5 per share acquired.
The fair value of 1 common share was $11 at March 1, 20X1.
Basic EPS for the year 20X0 (prior to the rights issuance) was $2.20.

55-61 As a result of the bonus element in the January 20X1 rights issue, basic and diluted EPS for 20X0 will have to be adjusted retroactively. The number of common shares used in computing basic and diluted EPS is the number of shares outstanding immediately prior to the rights issue (500) multiplied by an adjustment factor. Prior to computing the adjustment factor, the theoretical ex-rights fair value per share must be computed. Those computations follow.

Diluted EPS would be adjusted retroactively by adding 50 shares to the denominator that was used in computing diluted EPS prior to the restatement.

ASC 260 does not address how an entity should incorporate the impact of a rights issue into the calculations of basic and diluted EPS for financial reporting periods before the most recent period. However, it is acceptable to calculate a single adjustment factor and use that amount to retrospectively adjust all previously reported EPS amounts. That is, the original outstanding shares of common stock used in each prior-period EPS calculation would be adjusted by the rights issue adjustment factor that is used to adjust basic and diluted EPS in the most recent reporting period.

Footnotes

In this context, “reissue” is considered in the general sense.

See footnote 1.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.