US Accounting Rulemakers Move to Bring Clarity to Preferred Stock Dividends

U.S. accounting rulemakers voted to issue a proposal to standardize the measurement of paid-in-kind (PIK) dividends on preferred stock, aiming to bring clarity and consistency to financial reporting.

The Financial Accounting Standards Board (FASB) on April 30, 2025, unanimously supported adding the project to its technical agenda, following recommendations from the Emerging Issues Task Force (EITF).

PIK dividends refer to a type of dividend payment made by a company to its preferred shareholders, where the payment is made in the form of additional shares of stock rather than cash. The topic is being addressed due to a lack of authoritative guidance in Generally Accepted Accounting Principles (GAAP) for measuring PIK dividends on equity-classified preferred stock, resulting in diversity in practice among companies.

The EITF developed recommendations for the board’s consideration in March, which were discussed during the meeting. The EITF recommended measuring PIK dividends based on the contractual terms of the preferred stock agreement, including the stated PIK dividend rate, and applying this approach to all entities, including private companies.

The FASB agreed with this recommendation, acknowledging the challenges of fair value measurement, especially for private companies, and the importance of providing useful information to investors.

“I think that fair value may not always yield useful information in certain circumstances, notwithstanding the challenges of determining fair value, particularly for private companies, and that the information on the liquidation value of preferred stocks could be very useful to investors, particularly in their ability to pay cash dividends,” FASB member Susan Cosper said.

The board also discussed transition methods and leaned towards providing both a prospective application and an optional modified retrospective method to gather comprehensive feedback.

Board members said that in general, they felt the benefits of the guidance would justify the costs, as the necessary information for calculating PIK dividends is already available to issuers.

The proposal will be issued with a 25-day comment period due to the narrow scope of the issue and prior input from the EITF.