Dividends are a distribution from the company to its owners. It is generally the case, under companies legislation, that dividends can be paid only from profits, and not from capital. In some jurisdictions, companies must comply with a solvency test before paying dividends. The purpose in both situations is to protect the creditors, as any money paid to shareholders is money unavailable for paying creditors.
Different Types Of Dividends :
Dividends are sometimes divided into interim dividends and final dividends. Interim dividends are paid during the financial year, while final dividends are declared by the directors at financial year-end for payment sometime after the end of the reporting period. In some companies, the eventual payment of the final dividends is subject to approval of the dividend by the annual general meeting. With the final dividend, there is some debate as to when the company should raise a liability for the dividend, particularly where payment of the dividend is subject to shareholder approval.
Some would argue that until approval is received there is only a contingent liability, the entity not having a present obligation to pay the dividend until approval is received. Others argue that there is a constructive obligation existing at year-end and, given customary business practice, the entity has a liability at the end of the reporting period.
Para 12 and 13 of IAS 10 Events after the Reporting Period states, if an entity declares dividends to holders of equity instruments after the reporting period, the entity shall not recognize those dividends as a liability at the end of the reporting period. If dividends are declared after the reporting period but before the financial statements are authorized for issue, the dividends are not recognized as a liability at the end of the reporting period because no obligation exists at that time. Such dividends are disclosed in the notes in accordance with IAS 1 Presentation of Financial Statements.
When Is Dividend Recognized?
If the dividends are not declared at the end of the reporting period, no liability is recognized at the end of the reporting period. When shareholder approval is required for dividends declared prior to the end of the reporting period, a liability should be recognized only once the annual general meeting approves the dividends, because before that date the entity does not have a present obligation. Until that occurs, the declared dividend is only a contingent liability. It is expected that companies that prefer to raise a liability at year-end will change their regulations or constitution so that dividends can be declared without the need for shareholder approval.