Common Stock Dividend Distributable

Common Stock Dividend Distributable is a stockholders' equity account used to record the par or stated value of common shares that a corporation has declared as a stock dividend but has not yet issued. It exists only between the declaration date and the distribution date. When the shares are issued, its balance is transferred to the Common Stock account and it returns to zero.

Despite the word "distributable", the account is not a liability. A stock dividend obliges the company to issue its own shares, not to pay out any assets, so the balance is shown in stockholders' equity, never among current liabilities, usually next to common stock. This sets it apart from dividends payable, the liability created when a cash dividend is declared. Some older dictionaries describe the account loosely, but under US GAAP it relates only to stock dividends.

Imagine a company announcing, "every shareholder will receive one extra share for every ten they own, to be sent out next month." Between the announcement and the day the new shares arrive, the company's books need somewhere to note that these shares have been promised.

Common Stock Dividend Distributable is that holding place. No money changes hands; the company is simply moving an amount from one part of shareholders' equity to another, and the holding account shows the shares that are on their way.

Under US GAAP, a small stock dividend, generally one that increases outstanding shares by less than about 20% to 25%, is recorded at the fair value of the shares issued. A corporation has 200,000 shares of $1 par common stock outstanding, trading at $18 per share. Its board declares a 10% stock dividend, or 20,000 shares.

• On the declaration date: debit Retained Earnings $360,000 (20,000 × $18); credit Common Stock Dividend Distributable $20,000 (20,000 × $1); credit Paid-in Capital in Excess of Par – Common $340,000.
• On the distribution date: debit Common Stock Dividend Distributable $20,000; credit Common Stock $20,000.

After distribution, 220,000 shares are outstanding. Retained earnings has fallen by $360,000 and contributed capital has risen by the same amount, so total stockholders' equity is unchanged.

A large stock dividend, usually above 20% to 25%, is recorded at par value rather than fair value, because a dividend of that size tends to reduce the share price in proportion, much like a stock split. If the same company declared a 50% stock dividend of 100,000 shares, it would debit Retained Earnings $100,000 and credit Common Stock Dividend Distributable $100,000 at declaration, then transfer the $100,000 to Common Stock on distribution. Some companies charge large stock dividends to paid-in capital rather than retained earnings where state law allows.

If a balance sheet date falls between declaration and distribution, Common Stock Dividend Distributable appears in the contributed capital section of stockholders' equity, typically immediately below Common Stock. The notes describe the dividend and the date of distribution. Because the number of shares changes, earnings per share for all periods presented is restated retroactively to reflect the stock dividend, so that per-share figures remain comparable.

A stock dividend allows a company to reward shareholders and signal confidence without using cash, which it may want to keep for growth or debt repayment. It also capitalizes part of retained earnings permanently into contributed capital, which some boards prefer. For shareholders, the effect is largely cosmetic: each holds more shares, but owns the same percentage of a company whose value has not changed. Under US federal income tax rules, a pro rata stock dividend on common stock is generally not taxable when received; the shareholder's cost basis is spread over the larger number of shares. The board of directors must still declare the dividend formally, and the company must have enough authorized but unissued shares to complete it, which ties the account to the authorized number of shares in its charter. Analysts reading the equity statement should recognize that a jump in contributed capital alongside a fall in retained earnings, with no cash movement, usually reflects a stock dividend recorded through this account.

• Financial Accounting Standards Board
• US Securities and Exchange Commission