Under international accounting standards there are 2 forms of equity:
– Contributed equity which is known as the inflows from equity contributors
– Reserves which arise as a result of increases in equity other than from contributions from equity participants.
Reserves may arise from various actions:
– earnings of profits [retained earnings]
– increases in the fair value of assets [asset revaluation surplus]
Unlike share capital, reserves are not created via cash flows into the entity.
Recognition of dividend payable:
Dividends may be paid out of reserves, but not out of capital.
IFRIC 17 “Distributions of Non-cash Assets to Owners” :
A dividend payable should be recognized when the dividend is appropriately authorized and is no longer at the discretion of the entity.
If a dividend is not declared at end of reporting period, no liability is recognized.
If a liability is declared after end of reporting period, a liability is recognized only if the dividends are appropriately authorized and no longer at the discretion of the entity. For example, if the payment of dividends requires the approval of shareholders at a forthcoming AGM, then they are still at the discretion of the entity and no liability is raised.
The reason for this treatment is that no present obligation exists while an entity still has discretion in relation to payment.