Accounting Treatment
Dividends on ordinary share capital constitute an apportionment of the profits attributable to owners of the business and hence should not be charged as an expense in the income statement. Instead, such dividends must be accounted for as a deduction from the retained earnings presented in the statement of changes in equity.
For accounting purposes, scrip dividends, also known as bonus issues, shall not be considered as dividends since they do not involve the distribution of any assets to the shareholders.
As articles of association of companies usually require dividend payments to be made proportionate to the amount paid up on shares, the amount recognized as dividends should be pro-rated to account for any shares that are not yet fully paid.
Accounting Entries
Following accounting entries should be recognized for recording dividend payable:
|
Debit |
Retained Earnings |
|
|
Credit |
Dividend Payable |
|
Upon the payment of dividend, following entries shall be recognized:
|
Debit |
Dividend Payable |
|
|
Credit |
Bank |
|
|
Credit |
Withholding Tax Payable* |
|
*Applicable where tax on dividend income is required to be deducted at source by the companies issuing the dividend.
When to recognize dividend?
Dividend payable should be recognized when the issuance of dividend is properly authorized.
Dividend is authorized for issue when:
- Issuance of dividend is approved by the relevant authority (e.g. shareholders) upon the recommendation of management in jurisdictions that require such approval; or
- Dividend is declared by the management (e.g. board of directors) in jurisdictions that do not require any further approval.
In any case, no liability in respect of dividends shall be recognized where dividends are declared after the end of the reporting period. If however such dividends are declared before the authorization of financial statements, they shall be disclosed in the notes in accordance with IAS 10 Events after the Reporting Period.
Presentation & Disclosure
IAS 1 Presentation of Financial Statements requires the following in respect of dividends:
- Amount of dividends recognized (in total and per share) to be disclosed in the statement of changes in equity or in the notes.
- Dividends declared after the end of the reporting period but before the authorization of financial statements not recognized as dividends during the period to be disclosed in the notes.
IAS 1 prohibits presentation of the above information in the income statement.
IAS 7 Statement of Cash Flows allows presentation of dividends paid during the period in either:
- Cash flow from operating activities; or
- Cash flow from financing activities.
Example
During the year ended 31 December 2013, ABC PLC paid the following dividends:
- Final dividend of last year amounting $2 per share (declared in the previous accounting period)
- Interim dividend of $1 per share
Final dividend for the current year was declared on 10 January 2014 amounting $2.5 per share. No interim dividend was declared in the previous accounting period. Dividend payments made last year amounted $1,500,000 in respect of dividends declared in 2011.
ABC PLC has 1 million fully paid ordinary shares in issue of $1 each.
Payment of dividends is subject to withholding tax of 5%.
Following accounting entries will be recorded during the year ended 31 December 2013:
| Final dividend - Payment | ||
|---|---|---|
|
Debit |
Dividend Payable |
$2,000,000 (1 million shares x $2) |
|
Credit |
Bank |
$1,900,000 ($2,000,000 x 95%) |
|
Credit |
Withholding Tax Payable |
$100,000 ($2,000,000 x 5%) |
| Interim dividend - Payable | ||
|---|---|---|
|
Debit |
Retained Earnings |
$1,000,000 (1 million shares x $1) |
|
Credit |
Dividend Payable |
$1,000,000 |
| Interim dividend - Payment | ||
|---|---|---|
|
Debit |
Dividend Payable |
$1,000,000 (1 million shares x $1) |
|
Credit |
Bank |
$950,000 ($1,000,000 x 95%) |
|
Credit |
Withholding Tax Payable |
$50,000 ($1,000,000 x 5%) |
Information relating to dividends shall be presented in the statement of changes in equity and statement of cash flows as follows:
ABC Plc
Statement of changes in equity for the year ended 31st December 2012-13
| Share capital | Retained earnings | Revaluation surplus | Total equity | |
|---|---|---|---|---|
|
|
USD |
USD |
USD |
USD |
|
Balance at 1 January 2012 |
100,000 |
300,000 |
1,000,000 |
5,000,000 |
|
Changes in equity for the year 2012 |
||||
|
Profit for the year |
- |
2,500,000 |
- |
2,500,000 |
|
Dividends - Final Dividend of $2 per share |
- |
(2,000,000) |
- |
(2,000,000) |
|
Balance at 31 December 2012 |
1,000,000 |
3,500,000 |
1,000,000 |
5,500,000 |
|
Changes in equity for the year 2013 |
||||
|
Profit for the year |
- |
3,000,000 |
- |
3,000,000 |
|
Dividends |
- |
(1,000,000) |
- |
(1,000,000) |
|
Balance at 31 December 2013 |
1,000,000 |
5,500,000 |
1,000,000 |
7,500,000 |
ABC Plc
Statement of Cash Flows for the year ended 31st December 2012-13 (Extract)
| 2013 | 2012 | |
|---|---|---|
|
|
USD |
USD |
|
Financing Activities |
||
|
Dividends Paid * |
3,000,000 |
1,500,000 |
* Dividend paid could also be presented in cash flow from operating activities. The solution assumes withholding tax payable is settled in the same accounting period.
The details of the final dividend of $2.5 per share declared after the end of the reporting period shall be disclosed in the notes to financial statements.
Please note that the final dividend of last year is presented as a deduction from the retained earnings of 2012 as it was declared in that period.
This article deals with cash dividends on equity shares. Accounting for dividends involving transfer of non-monetary assets shall be covered in a separate article.