The term “stock dividend” refers to an issuance by an association of its own guarantee stock to its stockholders without consideration and under conditions indicating that such action is prompted mainly by a desire to give the recipient stockholders some ostensibly separate evidence of a part of their respective interests in accumulative earnings without distribution of cash or other property which the board of directors deems necessary or desirable to retain in the business.

The term “Stock Split-Up” refers to an issuance by an association of its own guarantee stock to its stockholders 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, obtaining wider distribution and improved marketability of the shares.

The accounting for stock split-ups presents no significant problems as no accounting entries are generally required. The accounting for stock dividends, however, requires adjustments to the capital stock and capital surplus accounts to reflect the market value of the stock dividend.

Generally accepted accounting principles require that the fair value of the shares issued be capitalized and charged to retained earnings; however, no distinction is made between appropriated or unappropriated retained earnings. Either unappropriated and/or appropriated retained earnings may be capitalized as capital surplus for the purpose of recording a stock dividend, thus satisfying the requirements of generally accepted accounting principles.

In accounting for stock dividends, the guarantee stock and capital surplus accounts must be increased in an amount equivalent o the fair market value of the stock issued, if determinable, or by some reasonable amount if the fair market value is not easily determined. The guarantee stock account must be increased by the par value of the shares issued and any amount in excess credited to a capital surplus account. The capital surplus account shall be segregated into two segments, that directly contributed by the investors, and that contributed by appropriations from retained earnings or general reserves as stock dividends.

If the transfer to the latter account is from the Federal Insurance Reserve or another general reserve account, this must be disclosed or annotated to preserve its identity.