The accounting and disclosure of dividends can seem simple but beware of falling foul of the technical complexities.
When to provide for a dividend
If a dividend is paid in the year then, as long as there are distributable reserves (see below), there is little to debate in terms of the accounting. This ‘payment’ could be in terms of an actual bank payment or it could be an entry in the accounting records to the director’s loan account, coterminous with the decision to pay the dividend.
For dividends ‘paid’ after the year-end, reference needs to be made to accounting standards on provisions. These state that for it to be provided at the year-end there must be an obligation at the year-end.
A history of paying dividends does not generate an obligation; neither does a declaration of a dividend after the year-end. For a dividend to be provided at the year-end, it must be approved by the shareholders before the year-end.
When documenting the decision to include dividends in the accounts, firms must take great care that they document when decisions were made. For example, director-shareholders decide at a meeting on 31st December to declare a final dividend but do not ask the accountant to prepare documentation and journals until January. It would be acceptable for the accountant to date these documents and accounting entries on the date the decision was made.
However if, having reviewed the 31st December accounts prepared by the accountant, the director-shareholders decide to declare a dividend in January then this cannot be put into the 31st December accounts. For the accountant to do so would be fraud.
Dividends must be paid out of distributable profits and directors must prepare ‘relevant’ accounts to confirm the position. If it later transpires there are no distributable profits and relevant accounts were not prepared then the dividend is illegal and repayable, and should be disclosed as such.
While there has been much debate about this over recent months, the ICAEW’s position is clear. As directors are clearly related parties, then dividends paid to them should be disclosed as related party transactions under the FRSSE / FRS 8.
However it should be noted that disclosure is only required if the transactions are material. Furthermore, disclosure is only required in the full accounts and not in the abbreviated accounts.
Firms must take care to understand fully the issues surrounding the accounting and disclosure of dividends. They must also document decisions made and discussions with clients. It is only by doing so that firms will be able to support their treatment and disclosure.
[Originally published by the ACCA on 21 Jan 2011]