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Dividends are distributions to owners or stockholders. They may be paid in cash, stock, or as dividends in kind.
Cash dividends declared are generally reported as a deduction from retained earnings. As depicted in Figure FSP 5-1, dividends declared or paid are normally presented in the statement of stockholders' equity at the amount per share, and in total for each class of shares as required by S-X 3-04. In the absence of retained earnings, cash dividends should generally be charged to APIC. This treatment is supported by analogy to SAB Topic 3-C (codified in ASC 480-10-S99-2, which requires accretion of redeemable preferred stock to be charged to APIC in the absence of retained earnings.
A parent company may declare a dividend from other than its accumulated earnings (e.g., from APIC, unrecorded increases in value of the company, or retained earnings resulting from parent's equity in undistributed earnings of a subsidiary). Laws in many jurisdictions have restrictions on declaring dividends from other than a reporting entity's accumulated profits. Accordingly, whenever dividends are declared from other than a parent company's retained earnings, the reporting entity should consider obtaining an opinion of counsel as to the legality of the declaration. A reporting entity may also wish to record a dividend as an addition to accumulated deficit. The legal character of a dividend as a charge to accumulated deficit instead of APIC may be followed for accounting purposes when the dividend is not a legal return of capital.
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