Property Dividend

A property dividend, also called a dividend in kind, is a distribution of a corporation's non-cash assets to its shareholders. Instead of paying cash or issuing additional shares, the company hands over assets such as shares or bonds it holds in other companies, inventory, real estate or other physical property. Property dividends are uncommon among large public companies because many assets cannot easily be divided among thousands of shareholders, but they are used by closely held companies, by groups distributing shares of a subsidiary, and occasionally as a marketing gesture, for example when a distiller or food company sends products to its shareholders.

Like a cash dividend, a property dividend must be declared by the board of directors and is subject to the legal limits on distributions in the company's state of incorporation. It reduces retained earnings and the company's assets.

Under US GAAP (ASC 845), a non-reciprocal transfer of non-monetary assets to owners is generally recorded at the fair value of the assets distributed. The steps are:

• On the declaration date, the company remeasures the assets to their fair market value and recognizes any gain or loss in income.
• It then records the dividend by debiting retained earnings and crediting a property dividends payable liability for the fair value.
• On the distribution date, it debits the liability and credits the asset account, removing the assets from the books.

An important exception is a spin-off: a pro rata distribution of the shares of a consolidated subsidiary that constitutes a business is recorded at carrying amount, with no gain. Under IFRS, IFRIC 17 requires a dividend payable in non-cash assets to be measured at the fair value of the assets, with the difference between that amount and their carrying amount recognized in profit or loss when the dividend is settled. Common-control distributions, such as most spin-offs, are outside its scope.

A holding company owns 100,000 shares of a listed technology company, carried at a cost of $2,000,000. Its board declares a property dividend distributing these shares to its own shareholders. On the declaration date, the shares are worth $32 each, a total fair value of $3,200,000.

The gain on remeasurement is:

Here $\text{Fair value at declaration}$ is the market value of the assets to be distributed and $\text{Carrying amount}$ is their value on the books. The gain is $3,200,000 minus $2,000,000, or $1,200,000. The company records:

• Declaration: debit investment $1,200,000 and credit gain on distribution of property $1,200,000; then debit retained earnings $3,200,000 and credit property dividends payable $3,200,000.
• Distribution: debit property dividends payable $3,200,000 and credit investment $3,200,000.

Retained earnings fall by $3,200,000, but net income includes the $1,200,000 gain, so the net reduction in equity is $2,000,000, the carrying amount of the shares given away. The gain is similar to a gain on sale of assets and would be shown outside operating income.

In the United States, a shareholder who receives a property dividend is generally treated as receiving a distribution equal to the fair market value of the property, taxed as a dividend to the extent of the corporation's earnings and profits. The shareholder's tax basis in the property is its fair market value. The distributing corporation generally recognizes gain, but not loss, as if it had sold appreciated property at fair market value, so a property dividend of appreciated assets can create corporate-level tax. Qualifying spin-offs can be tax-free under section 355 if strict conditions are met. Guidance is published by the Internal Revenue Service.

Property dividends differ from cash dividends, which reduce cash, and from stock dividends, which distribute additional shares of the company itself and do not reduce assets. A scrip dividend is a promise to pay later. For each type, the company records dividends declared on the declaration date and a liability such as dividends payable until payment, and every shareholder of record receives their pro rata share.