Definition
Accumulating shares, also known as scrip dividends or stock dividends, are additional ordinary shares issued to holders of a company’s ordinary shares instead of a cash dividend. This means shareholders receive extra shares rather than a cash payout. The issuance of accumulating shares allows shareholders to increase their investment in the company while deferring income tax, although they remain liable for capital gains tax upon the sale of their shares.
Examples
-
Company A: Suppose Company A declares a dividend. Instead of paying this dividend in cash, Company A offers shareholders the option to receive accumulating shares. If a shareholder would have received $100 in dividends, they might instead receive additional shares worth $100.
-
Investment Strategy: An investor in a tech firm that issues accumulating shares prefers to reinvest dividends into additional shares to benefit from long-term capital gains rather than receiving short-term income that is subject to income tax.
Frequently Asked Questions (FAQs)
What are the primary benefits of accumulating shares?
- Tax Deferral: They allow shareholders to defer paying income tax on dividends.
- Capital Growth: By receiving shares instead of cash, shareholders can potentially benefit from stock price appreciation over time.
Are shareholders required to pay taxes on accumulating shares?
- Yes, while they avoid income tax on the dividends, they might be subject to capital gains tax when they eventually sell the accumulating shares.
How does the company handle the declaration of dividends with accumulating shares?
- The company deducts tax in the usual manner from the declared dividend. The net amount is then used to acquire additional shares for the shareholder.
Can accumulating shares impact the share price of a company?
- The issuance of additional shares can potentially dilute the share price if the total number of outstanding shares increases significantly.
Are accumulating shares suitable for all investors?
- Not necessarily. They are more beneficial for investors seeking long-term capital growth rather than immediate income.
Related Terms
- Ordinary Shares: Equity ownership in a company, representing a claim on part of the company’s profits.
- Dividend: A payment made by a corporation to its shareholders, usually as a distribution of profits.
- Capital Gains Tax: A tax on the profit from the sale of property or an investment.
- Scrip Dividend: A dividend paid in the form of additional shares rather than cash.
Online Resources
Suggested Books for Further Studies
- “Investment Analysis and Portfolio Management” by Frank K. Reilly and Keith C. Brown
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- “Tax Savvy for Small Business” by Frederick W. Daily
Accounting Basics: “Accumulating Shares” Fundamentals Quiz
### What are accumulating shares?
- [x] Additional ordinary shares issued instead of a cash dividend.
- [ ] Bonus shares issued by the company.
- [ ] Shares bought on the secondary market.
- [ ] Preferred shares with accumulated dividends.
> **Explanation:** Accumulating shares are additional ordinary shares issued to shareholders in lieu of a cash dividend.
### What is one primary advantage of accumulating shares?
- [x] They avoid income tax.
- [ ] They avoid capital gains tax.
- [ ] They provide immediate income.
- [ ] They increase short-term liquidity.
> **Explanation:** Accumulating shares can avoid income tax by not paying out cash dividends but can still result in capital gains tax when sold.
### Can accumulating shares lead to tax deferral?
- [x] Yes, they can defer income tax until shares are sold.
- [ ] No, they do not provide any tax benefits.
- [ ] Yes, they provide a permanent tax exemption.
- [ ] No, they lead to immediate tax liabilities.
> **Explanation:** Since accumulating shares replace dividends with additional shares, they can defer income tax until the shares are sold.
### When are shareholders liable for capital gains tax with accumulating shares?
- [ ] When the shares are issued.
- [ ] When dividends are declared.
- [x] When the shares are sold.
- [ ] When the initial investment is made.
> **Explanation:** Shareholders may be liable for capital gains tax when they sell the accumulating shares at a profit.
### Why might a company offer accumulating shares?
- [x] To conserve cash while rewarding shareholders.
- [ ] To discourage long-term investment.
- [ ] To increase short-term profitability.
- [ ] To dilute shareholder equity significantly.
> **Explanation:** Companies might offer accumulating shares to conserve cash while still providing a form of return to shareholders.
### What tax implication is avoided with accumulating shares?
- [x] Income tax on dividends.
- [ ] Capital gains tax on profits.
- [ ] Corporate income tax.
- [ ] Property tax on shares.
> **Explanation:** By receiving accumulating shares instead of cash dividends, shareholders avoid income tax on the dividend.
### When might a shareholder prefer accumulating shares?
- [x] When seeking long-term capital growth.
- [ ] When needing immediate income.
- [ ] When liquidating their holdings.
- [ ] When wants no reinvestment options.
> **Explanation:** Shareholders who seek long-term capital growth may prefer accumulating shares as these defer income tax and provide potential future gains.
### How does a company deduct taxes for accumulating shares?
- [ ] No tax is deducted.
- [ ] Fully deducted at issuance.
- [x] Tax is deducted in the usual way from the declared dividend.
- [ ] Taxes are deducted when shares are sold.
> **Explanation:** Companies deduct tax in the usual way from the declared dividend, and the net dividend amount is used to buy additional ordinary shares for the shareholder.
### What happens to the net dividend from declared dividends in the form of accumulating shares?
- [ ] It is paid out as cash.
- [x] It is used to buy additional shares.
- [ ] It is reinvested into company projects.
- [ ] It is held as a retained earnings reserve.
> **Explanation:** The net dividend is used to acquire additional shares for the shareholder if accumulating shares are issued.
### Are accumulating shares beneficial for immediate cash needs?
- [ ] Yes, they provide cash immediately.
- [x] No, they convert dividends into additional shares.
- [ ] Yes, they instantaneously increase liquidity.
- [ ] No, they avoid all forms of tax liabilities.
> **Explanation:** Accumulating shares are not beneficial for those needing immediate cash as they provide additional shares instead of a cash payout.
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!
