Accounting treatment of Proposed Dividend

?If the Board of Directors of a company has recommended a dividend for the financial year 2020-21 then how it could be presented in the financial statement?

Answer:

When a company closes its financials for a year the board of directors is the only authority to approve it and then to authenticate it.??Seeing the performance of the Company in numbers, the Board of Directors may or may not recommend the dividend, the recommendation is just a suggestion from the Board of Directors to the Shareholders which may or may not be accepted by the shareholders, in other words, recommendation of the Board requires approval from the shareholder to become dividend payable. Till the time it is approved or declared by the shareholders the dividend doesn't become a liability to the company but once the dividend is declared by the shareholder, it becomes a liability and has to be paid within 30 days of declaration. Further, the shareholder has the right to reject the dividend recommendation of the board.

Further, it may be noted that the shareholders may declare a dividend that is lesser than the amount recommended by the Board. However, it cannot declare dividends over and above the amount recommended by the Board. Article 80 of Table F of Schedule I states that ‘The company in general meeting may declare dividends, but no dividend shall exceed the amount recommended by the Board.’

Hence, till the time dividend is not declared by shareholders in a general meeting it is not a liability to the company.

While analyzing the nature of provisions made for payment of dividend, the Supreme Court explained the whole process in the case of Vazir Sultan Tobacco Co. Ltd.Etc. v. Commissioner of Income tax Andhra Pradesh, Hyderabad [1982 SCR (1) 789] and held that ‘It is, no doubt, true that the recommendations of the Directors for payment of any dividend does not create any kind of liability for the payment of the said amount. The liability for payment of any amount by way of dividend only arises when the share-holders accept the recommendations and a dividend is declared at the Annual General Meeting of the Company. It is open to the Directors to modify or withdraw the recommendation with regard to the payment of dividend before the said recommendation is accepted by the share- holders. It is also open to the shareholders not to accept the recommendation of the Directors in its entirety and to modify the same. The legal liability for the payment of any dividend only arises after the share-holders at the annual general meeting have decided to declare a dividend on the basis of the recommendations of the Directors or on the basis of any modification thereof. The liability for the payment of dividend only arises after the dividend has been declared by the share-holders at the annual general meeting and this liability does not relate back to any earlier date on the basis of the recommendations of the directors as the directors do not enjoy any power of declaring the dividend. The amount that may be set apart for payment of any dividend on the basis of the recommendations made by the Directors cannot be considered to be an amount set apart for meeting a known or existing liability.

The same has taken the attention of the lawmakers which caused them to make the amendment to the Schedule 3 of Companies Act 2013 vide Notification dated 6th April 2016 and amendment in Accounting Standard 4.

Amended Accounting Standard read with Schedule 3 of Companies Act 2013 inter-alia provides that proposed dividend should only be shown as a footnote to the balance sheet.

In light of the above discussion my view on the accounting treatment of Proposed Dividend and it presentation in the final Financial Statement is be as follow:

Accounting Entry: No accounting entry should be passed for the recommendation of final Dividend by the Board of Directors, if such recommendation has been made after the date of closing of Financial Statement.

Treatment in Profit & Loss Account: Proposed Dividend may not affect the Profit and Loss Account of the Company. However effect of such dividend shall be taken in the financial year in which it has been actually declared by the shareholders in the Annual General Meeting.

Presentation in the Balance sheet: Dividend proposed by the Board of Directors for the financial year, 2020-21 is not a liability till it has been approved by the shareholders in the ensuing Annual General Meeting.

Para 14 of Accounting Standard (AS) 4 also provide that If an enterprise declares dividends to shareholders after the balance sheet date, the enterprise should not recognise those dividends as a liability at the balance sheet date unless a statute requires otherwise. Such dividends should be disclosed in notes.

Thus, the?proposed dividend is neither shown as current liabilities nor as a short-term provision in the current Balance Sheet of a company but shall be disclosed in Notes to Accounts.

Effect on Cash Follow Statement: The dividend?proposed for the previous year will be an outflow for cash in the current financial year, unless otherwise stated, on the assumption that the proposed amount has been approved by the shareholders in the ensuing AGM. No effect is given to Proposed Dividend for the current year’s Cash Follow Statement as it is not provided for and is a contingent liability only till it’s get declared by the Shareholders in the AGM.

Declaration in Director’s Report: The provision in clause (k) of sub-section (3) of section 134 states that the board of directors must state in its Report, the amount, if any, which it recommends to be paid by way of dividend.?Hence the dividend recommended by the board of directors must be mentioned in the Directors’ Report.?

CS Ravi Bhushan Kumar

IP,ID,FCS, LL.B, B.Com(H), M.Com