New Treatment of Proposed Dividend & Bonus Issues

Muhammad Adnan Arshad · 06-28-2006, 04:30 PM

Circular No. 06/2006 June 19, 2006
Ref http//www.icap.org.pk/Circulars/circulars2006/Circular%20No%2006.htm
Dear Members!

As members are aware that Securities and Exchange Commission of Pakistan (SECP) in July 2004 revised the Fourth Schedule to the Companies Ordinance, 1984 and one of the changes was removal of the words âproposed dividendâ under the heading of âCurrent Liabilitiesâ in order to bring the treatment of proposed dividend in line with the requirements of paragraph 12 of International Accounting Standard (IAS-10) âEvents After the Balance Sheet Dateâ. Subsequently, the State Bank of Pakistan through its BSD Circular No. 04 dated February 17, 2006 issued âRevised Forms of Annual Financial Statementsâ in which reference to proposed dividend have also been removed. However, Fifth schedule to the Companies Ordinance, 1984 and other schedules containing formats of various specialized entities (e.g. Modarabas, mutual funds, general insurance companies etc.) still contain disclosure requirement of proposed dividend either in appropriations or other liabilities.

In order to remove the inconsistencies and to bring the accounting for aforesaid appropriations in line with the requirements of IAS â 10, the Professional Standards and Technical Advisory Committee in its 51st meeting held on March 6, 2006 discussed the issue and clarified that all entities should follow the requirements of IAS â 10 notified by the SECP under the provisions of Section 234(3) of the Companies Ordinance, 1984 and hence part of the legal framework. Accordingly all declarations of dividends to holders of equity instruments including declaration of bonus issues and other appropriations except appropriations which are required by law (e.g. statutory reserves) after the balance sheet date, should not be recognized as liabilities or changes in reserves at the balance sheet date. Such declarations/appropriations should be disclosed in the notes in accordance with IAS -1 as well as the requirements in relevant statutes.

Members are requested to note the above and ensure appropriate treatment of proposed dividend and bonus issues while preparing / auditing the financial statements.

Thanking you!

Yours truly,

Shahid Hussain,
Deputy Director Technical Services, ICAP

Abdur.Rehman · 07-01-2006, 04:49 AM

Thanx for the specific references. But, sir i want two ask questions in this regard.
Wut if the dividend is proposed but not yet approved by the shareholders
and is the approval of proposed dividend removed from the ordinary business in AGM
waiting 4 reply...

insaan · 07-03-2006, 05:44 AM

AOA
abdur rehman
let me try
an event B/W balance sheet date and date of authorization of issue is a subsequent event(IAS 10.3)
and date of authorization may be(IAS 10.4,10.5,10.6)
Date of
â¢ BOD authorisation for issue (to outsiders), or
â¢ Management authorisation for issue to supervisory board(solely of non executives)
and as per pakistan,date of authorization of issue is date of BOD authorization for issue,approval by shareholders is immaterial in this regards

the circular only deals with propposed dividend B/W B/S date & date of
BOD authorisation of isue
that is,
if dividend is proposed & approved/unapproved by shareholders , it would be a nonadjusting event

and as far as approval of proposed dividend in AGM is concerned..companies ordinance applies in this case & look if there has been any ammendment in this regards
AH

Abdur.Rehman · 07-03-2006, 06:42 AM

ok i got it. My opinion was also the same. I just wanted to reconfirm from someone.
thanx for the consideration.

rememberence · 07-03-2006, 02:53 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by insaan
 AOA
abdur rehman
let me try
an event B/W balance sheet date and date of authorization of issue is a subsequent event(IAS 10.3)
and date of authorization may be(IAS 10.4,10.5,10.6)
Date of
â¢ BOD authorisation for issue (to outsiders), or
â¢ Management authorisation for issue to supervisory board(solely of non executives)
and as per pakistan,date of authorization of issue is date of BOD authorization for issue,approval by shareholders is immaterial in this regards

the circular only deals with propposed dividend B/W B/S date & date of
BOD authorisation of isue
that is,
if dividend is proposed & approved/unapproved by shareholders , it would be a nonadjusting event

and as far as approval of proposed dividend in AGM is concerned..companies ordinance applies in this case & look if there has been any ammendment in this regards
AH

<hr height="1" noshade id="quote"></blockquote id="quote">

Let me draw attention to para 20 of IAS 37. Dividend not yet approved by shareholders is not obligation of the entity. So, AbdurRehman the answer of your question is that BOD's recommendation of dividend does not give rise to obligation because BOD only recommends and shareholders are the ultimate approval

And in this regard I can show the reference of examiner comments.

Waiting for reply

insaan · 07-03-2006, 05:46 PM

AOA
yes u r rite
Dividend not yet approved by shareholders is not obligation of the entity.

here is para 20 of IAS 37
An obligation always involves another party to whom the obligation is owed. It is
not necessary, however, to know the identity of the party to whom the obligation is
owedâindeed the obligation may be to the public at large. Because an obligation
always involves a commitment to another party, it follows that a management or
board decision does not give rise to a constructive obligation at the balance sheet
date unless the decision has been communicated before the balance sheet date to
those affected by it in a sufficiently specific manner to raise a valid expectation in
them that the entity will discharge its responsibilities.

para 37 tells us
that a constructive obligation wud arise only when the party/parties affected by such obligation have been communicated before the balance sheet date
it all goes exactly in line with IAS10,& 4 dividend purposedu s[url][/url]ud preferably refer IAS 10 as it specifically presribes treatment of dividends...

now look wat para 20 says about proposed dividends
case is that dividends r 1st proposed by BOD,here ends scope of IAS10.
then after a few days in AGM shareholders approve/unapprove the dividends
now dividends approval is an obligating event & wud give rise to a constructive obligation (i.e final dividend)in the yr in which dividends are approved by share holders,not the yr in which dividends r proposed
hope it helps

and as far as examiners comments r concerned they wud 4 sure had been in line with IAS
however if u dont get them u may post them & v wud try to clarify ...

rememberence · 07-03-2006, 06:33 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by insaan
 AOA
yes u r rite
Dividend not yet approved by shareholders is not obligation of the entity.

here is para 20 of IAS 37
An obligation always involves another party to whom the obligation is owed. It is
not necessary, however, to know the identity of the party to whom the obligation is
owedâindeed the obligation may be to the public at large. Because an obligation
always involves a commitment to another party, it follows that a management or
board decision does not give rise to a constructive obligation at the balance sheet
date unless the decision has been communicated before the balance sheet date to
those affected by it in a sufficiently specific manner to raise a valid expectation in
them that the entity will discharge its responsibilities.

para 37 tells us
that a constructive obligation wud arise only when the party/parties affected by such obligation have been communicated before the balance sheet date
it all goes exactly in line with IAS10,& 4 dividend purposedu s[url][/url]ud preferably refer IAS 10 as it specifically presribes treatment of dividends...

now look wat para 20 says about proposed dividends
case is that dividends r 1st proposed by BOD,here ends scope of IAS10.
then after a few days in AGM shareholders approve/unapprove the dividends
now dividends approval is an obligating event & wud give rise to a constructive obligation (i.e final dividend)in the yr in which dividends are approved by share holders,not the yr in which dividends r proposed
hope it helps

and as far as examiners comments r concerned they wud 4 sure had been in line with IAS
however if u dont get them u may post them & v wud try to clarify ...
<hr height="1" noshade id="quote"></blockquote id="quote">

Man I have no doubt abt my concept. For your refernce examiner comments r reproduced

Q.3 The students were required to redraft the balance sheet according to the requirements of the International Accounting Standards. The common mistakes made by the students were as follows

Proposed dividend was shown in current liabilities. According to IAS 37 âProvisions, contingent liabilities and contingent assetsâ board of directors decision to proposed dividend does not give rise to a constructive obligation at the balance sheet date, unless it is approved in annual general meeting. Therefore, the proposed dividend should have been added to retained earnings.

Here is the link

http//icap.org.pk/Examination/ECOM-FPSUMMER2004.htm

Hope it will help u in eradicating confusions. Conceot is very simple " dividend proposed by BOD does not give rise to obligation unless approved in AGM. This is a clear cut answer to AbdurRehman's query..

good luck

insaan · 07-03-2006, 06:50 PM

yes v right dear
by da way comments relate to s 04 exams
at dat time infact proposed dividends were shown as lialbility as per IAS 1 as our compay law required so
however now company law has also harmonised itself with IAS
so now only 1 treatment 4 proposed dividend

rememberence · 07-03-2006, 07:02 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by insaan
 yes v right dear
by da way comments relate to s 04 exams
at dat time infact proposed dividends were shown as lialbility as per IAS 1 as our compay law required so
however now company law has also harmonised itself with IAS
so now only 1 treatment 4 proposed dividend
<hr height="1" noshade id="quote"></blockquote id="quote">

at that time proposed dividend had the same treatment as now as per IAS! rather it was requirment of 4th schedule dear[)]

infact the question was to redraft the balance sheet(given in question which was in accordance with law) as per IASs. so the dividend proposed by BOD shall hve to be deducted as liability and added back to RE as the propsed dividend was not and is not liability as per IAS

insaan · 07-03-2006, 07:57 PM

yes again u r rite
4th schedule is infact part of company law
and IAS 1 requires F.S to be drafted as per local laws ,in our case,companies ordinance ,if they r in conflict with any IAS,isn't it so..
as far as company law is concerned i have't read it ,so in that regard i only know what our teacher has told us.however i have read IAs

and since the question required to be attempted in accordance with IAS a better treatment wud hav been as commented by the examiner

however a person doing it otherwise wud also hav been following IAS1,so as per IAS again..bt preferred wud be 1st 1

leave everything else;
now onwards
circular by ICAP has now very clearly stated the treatment of proposed dividend

proposed dividend after B/S date are always to be a non adjusting event

now only dividend paid are to be adjusted by retained earnings
and dividend paid in a yr = interim dividend paid+proposed dividend of last yr paid in current yr

now watz ur opinion ,do u agree or not?just for now onwards treatment..leave 4 past ..as gone is forgone

Abdur.Rehman · 07-03-2006, 09:23 PM

Dividend once proposed by the director cannot be cancelled as per company law. Approval of shareholders is just a formality. So, i dont c a point in not recognizing a liability, if the BOD has proposed dividend before balance sheet date.

rememberence · 07-03-2006, 11:02 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by Abdur.Rehman
 Dividend once proposed by the director cannot be cancelled as per company law. Approval of shareholders is just a formality. So, i dont c a point in not recognizing a liability, if the BOD has proposed dividend before balance sheet date.
<hr height="1" noshade id="quote"></blockquote id="quote">

Its not the case AbdurRehman! In company law it is written that Shareholders cant approve dividend in excess of dividend proposed by BOD. Its not the case that they cant disapprove!

rememberence · 07-03-2006, 11:08 PM

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by insaan
 
yes again u r rite
4th schedule is infact part of company law
and IAS 1 requires F.S to be drafted as per local laws ,in our case,companies ordinance ,if they r in conflict with any IAS,isn't it so..
as far as company law is concerned i have't read it ,so in that regard i only know what our teacher has told us.however i have read IAs

and since the question required to be attempted in accordance with IAS a better treatment wud hav been as commented by the examiner

however a person doing it otherwise wud also hav been following IAS1,so as per IAS again..bt preferred wud be 1st 1

leave everything else;
now onwards
circular by ICAP has now very clearly stated the treatment of proposed dividend

proposed dividend after B/S date are always to be a non adjusting event

now only dividend paid are to be adjusted by retained earnings
and dividend paid in a yr = interim dividend paid+proposed dividend of last yr paid in current yr

now watz ur opinion ,do u agree or not?just for now onwards treatment..leave 4 past ..as gone is forgone

<hr height="1" noshade id="quote"></blockquote id="quote">

I was just clarifying ur opinion, you said in ur first post that by approval u mean BOD's approval. my opinion that BOD's approval is not an obligating event rather shareholders approavl in AGM is obligating event, as its clear from examiner comments too and from para 20 of IAS 37.

insaan · 07-04-2006, 04:23 AM

ok
i got ur point but here is as i go on this issue;

look now
my point of view is that
date of authorization of issue is the date when BOD authorizez F.S 4 issue , as for IAS 10 , so a subsequent event is the one occuring b/w B/S date & date of BOD's authorization 4 issue,now the event in this period may be adjusting or non adjusting,thatz the scope of IAS 10..so keeping in view of this proposed dividend after B/S date is non adjusting event...theek hai

now 4 IAS 37
u r very rite that constructive obligation wud arise when shareholders
approve in AGM..that's wat i also concluded from IAS 37 para20...now does this mean that a dividend proposed but not yet approved by shareholders in AGM before B/S date shall not be recorded as a liability.....it seems to be so as from examiner's comments

BUt here i wud quote another example from CAinter mod C s 2006 exam,
examiner asked
The directors approved and declared a 5% interim stock dividend on June 18, 2005. The shares were allotted on June 28, 2005 but no certificate has yet been issued to any shareholder.
here yr end is june 30 2005.
question required to prepare financial statements

in this case also since shareholders havent approved yet in AGM so no obligation should be recorded...
but examiner in his comments said
Q1(c)Stock dividend was not accounted for.

so here ,declaration of dividend before B/S date is treated as an obligating event..

now wat exactly the case is?
plz make it clear..
thx[)]

Abdur.Rehman · 07-04-2006, 02:07 PM

Here the directors are issuing bonus shares or stock dividend, which is covered under the powers of directors.
And i agree with wut rememberance said after confirming from a very reliable source.