Bonus shares vs stocks split

[PassiveReturns]

Interesting question raised by a forumer from CNA forum. Just for discussion.

Qn:

Anybody can tell me what's the difference?

I understand that bonus shares involved classifying retained profits as shares capital in the balance sheet, but for some recent bonus issues like wee hur and sim lian, they state that the bonus shares are issued at nil consideration without capitalisation of company's profit or reserves.

If there is no change in share capital, then isn't it the same as stocks split?

Anyone?




My view:

I do not think it has much difference for stock investors.

From stock investor's perspective, in both instances, stock price will be adjusted downwards and number of shares will increase, accordingly and respectively.

From company accounting point of view, the main difference between the two is on the face value (par value) of each share it issues. In the case of a stock split on the existing shares, the face value of each share will be reduced. As for bonus shares, they are normally in relation to the increased of retained equities since its inception of IPO, and they are issued addtionally to the existing shares - the par value of each of its share will remain the same.

Hence, after a stock split, the overall share capital (calculated from the face value of each share) remains the same. For bonus shares, the overall share capital will increase.

Base on the understanding by the above definition, in the case when bonus shares are issued at nil consideration without capitalisation of company's profit or reserves, I personally think it is as good as a stock split.

[Musicwhiz]

For me as an accountant, it's "substance over form", which means the substance of the transaction takes precedence over its form (i.e. what you call it). So stock splits or bonus issues essentially are the same from a financial perspective, as it sub-divides the number of shares into more shares.

Oh the par value of shares concept was also phased out some years ago, so this is not relevant any longer.

I can think of one minor difference - usually in the case of bonus issues, capital reserves may be transferred to share capital in the form of a book entry (no P&L or cash effect). For share splits, there is no such entry as the share capital itself is sub-divided into more of XY number of shares that's all. (where X is a multiple based on the split ratio and Y is the original number of issued shares)