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A REEXAMINATION OF ACCOUNTING FOR STOCK DIVIDENDS: IS IT TIME FOR A CHANGE?

GARY A VOLK, University of Nebraska - Lincoln

Abstract

The Financial Accounting Standards Board is continually evaluating current accounting practice to determine if current practice is in accord with accounting principles set forth in the Conceptual Framework. Recent literature has examined the accounting for stock dividends versus stock splits and found that generally accepted accounting principles (GAAP) in this area is in need of reform. This paper is an examination of accounting for small stock dividends (those less than 20 to 25 percent). GAAP guidelines indicate that small stock dividends be recorded at fair market value. Accounting textbooks suggest that fair market value is determined on the declaration date. Further, efficient market research indicates that there is no abnormal gain to be made with the information inherent in stock dividends. Thus, there should be no significant difference between the market price on the declaration date and the amount per share used to reduce retained earnings. This was the null hypothesis. Also tested were the ex-date, the date of record, and the date payable. Results of the tests of the null hypotheses that there is no significant difference between the market price per share on the date tested and the amount per share used to reduce retained earnings were to reject the null hypotheses. Other items were tested for their effect. These were different years, different sizes of small dividends, and different auditors of firms issuing small stock dividends. Further, tests of consistency were made on firms issuing stock dividends in each of two years. None of these additional tests influenced the results of the major hypothesis. In conclusion, the results indicate that in practice, firms issuing small stock dividends are not using the declaration date, ex-date, date of record, or the date payable to determine fair market value. This is in violation of the comparability principle set forth in the Conceptual Framework. Recommendations were made to revise the standards for accounting for small stock dividends and require capitalization of retained earnings of par value of the shares issued.

Subject Area

Accounting

Recommended Citation

VOLK, GARY A, "A REEXAMINATION OF ACCOUNTING FOR STOCK DIVIDENDS: IS IT TIME FOR A CHANGE?" (1986). ETD collection for University of Nebraska-Lincoln. AAI8706255.
https://digitalcommons.unl.edu/dissertations/AAI8706255

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