A) INTRODUCTION
Revised Schedule-VI has been promulgated by Ministry of Corporate Affairs, Government of India vide Notification No S.O. 447(E) dated 28th February,2011. In said notification reference has been made to the Accounting Standards notified under the Companies (Accounting Standards) Rules, 2006 i.e. AS 1 to 7 and 9 to 29. Accordingly the Revised Schedule VI has nothing to do with the 35 converged Indian Accounting Standards (IND. AS) converged with IFRS which were placed on the MCA website on 25th February,2011 which are yet to be notified.
As per the website of the Ministry of Corporate Affairs the Revised Schedule VI shall be effective from 01.04.2011 i.e. FY 2011-12 onwards. Accordingly the financial statements for the companies in respect of financial year 2010-11 shall continue to be governed by old (existing) Schedule VI.
Although the applicability of the Ind. AS converged to IFRS which was earlier slated to be implemented in a phased manner starting from 1st April, 2011 has been deferred, however the instant revision of Schedule VI can be considered as a step towards convergence to IFRS to some extent with regard to presentation of financial statements as many features/ disclosures have been taken from these international standards, one of such influence is that Proposed dividend is not recognized and only disclosed. Another important influence of IFRS relevant to the instant issue is that Accounting Standards have been given supremacy over Schedule VI i.e. in event of any conflict between Revised Schedule VI and Accounting Standards, AS will prevail which is in line with IFRS which mandates that no statute can override the Standards.
However despite change made in the Revised Schedule VI in respect of treatment of Proposed Dividend the same would not be applicable till consequential amendment is made in the Accounting Standard (AS) 4 “ Contingent and Events Occurring After the Balance Sheet Date”. To know why read further.
B) EXISTING PROVISIONS REGARDING PROPOSED DIVIDEND.
Part I of Old Schedule VI requires ‘proposed dividends’ to be shown as “Current Liabilities and Provisions” under subhead B “Provisions” at S. No 9. Further paragraph 3 (xiv) of Part II of the same requires for accounting and disclosure of the aggregate amount of the dividends paid, and proposed , and stating whether such amounts are subject to deduction of income-tax or not.
Further vide Circular No: 3/124/75-CL-V, dated 22.11.76, the companies were directed that there is a statutory obligation to provide for proposed dividend in the profit & loss account and show the same under the head’ current liabilities and provisions;’ in the balance sheet. The failure to make such provision in the accounts amounts to contravention of Schedule VI and such accounts will not be regarded as reflecting true and fair view of the state of affairs of the company.
In consonance to this approach Para 14 of the Accounting Standard 4 “ Contingent and Events Occurring After the Balance Sheet Date” as notified under Companies (Accounting Standard) Rules, 2006, also requires that dividends in respect of period covered by financial statements which are proposed or declared after balance sheet date but before date of approval should be adjusted in accounts.
Accordingly in view of above the proposed dividends were being accounted for in the financial statements of all the companies.
C) PROVISIONS REGARDING PROPOSED DIVIDEND UNDER REVISED SCHEDULE VI
Para 6(U) of the General Instructions for preparation of Balance Sheet of Part I of Revised Schedule VI does not mandate for provision for proposed dividend to be made and only desires disclosure of same in notes to accounts. The above revised treatment in respect of proposed Dividend is inspired from para 12 and 13 of IAS 10 (Ind. AS) “Events after the reporting period” wherein it is specifically stipulated that such dividends do not meet the criteria of a present obligation as per IAS 37 (Ind. AS 37) Provisions, Contingent Liabilities and Contingent Assets. Further IAS 1 (Ind. AS 1) “Presentation of Financial statements’ stipulates that such dividends are disclosed in the notes.
D) CONFLICT
Although Revised Schedule VI no longer requires accounting for proposed dividend, but as discussed above para 14 of the Accounting Standard 4 “Contingent and Events Occurring After the Balance Sheet Date” still requires that dividends in respect of period covered by financial statements which are proposed or declared after balance sheet date but before date of approval should be adjusted in accounts.
Accordingly there is a conflict between the Revised Schedule VI which states for non accounting of proposed dividend and AS 4 which mandates for such accountal to be made.
E) SOLUTION
The answer to this conflict lies in para 1 of the General Instructions for preparation of Balance Sheet and Statement of Profit and Loss of the Company, which is reproduced as under:-
“Where compliance with the requirements of the Act including Accounting Standards as applicable to Companies require any change in treatment or disclosure including addition, amendment, substitution or deletion in the head / subhead or any changes inter se, in the financial statements or statements forming part thereof, the same shall be made and requirements of the Schedule VI shall stand modified accordingly.”
From above it is evident that the requirement regarding accounting of proposed dividend as mandated in the AS 4 will prevail over the requirements provided in the Revised Schedule VI. Accordingly till consequential amendment is made in AS 4 , the companies would still required to continue to made accounting of the Proposed Dividend in financial statements commencing on or after 01.04.2011.
F) PROVISIONS REGARDING PROPOSED DIVIDEND UNDER IND. AS
As per Ind. AS 10 “Events after the reporting period” dividend proposed or declared after the reporting period, cannot be recognized as a liability in the financial statements because it does not meet the criteria of a present obligation. Such dividend is required to be disclosed in the notes in the financial statements as per Ind. AS 1“Presentation of Financial statements’. Ind. AS 10 further provides that the liability to pay a dividend shall be recognized when the dividend is appropriately authorized and is no longer at the discretion of the entity, which is the date of:
a) when declaration of the dividend e.g. by management or the board of directors, is approved by relevant authority e.g. the shareholders(normally at the Annual general Meeting), if the jurisdiction requires such approval., or
b) When the dividend is declared e.g. by management or the board of directors, if the jurisdiction does not require further approval.
As stated earlier the above provisions are as per the corresponding IAS and once Ind. AS are notified alongwith date of their applicability, no accounting would be required by the companies covered under Ind. AS in respect of the proposed dividend prior to approval from the competent authority.
G) CONCLUSION
Non accounting and mere disclosure of proposed dividend is a welcome move and a correct accounting principle as any amount should not be provided for until there is present obligation which in case of dividend arises when the same is approved by shareholders at the Annual General Meeting. However this change would not be operative till consequential amendment is made in the Para 14 of Accounting Standard 4 “Contingent and Events Occurring After the Balance Sheet Date” notified under Companies (Accounting Standard) Rules, 2006. It is pertinent to mention here that the ICAI has recently made proposal for modification of para 14 of AS 4 which now is proposed to state that
"If an entity declares dividends to shareholders after the balance sheet date, the entity should not recognise those dividends as a liability at the balance sheet date.
Accordingly after the said modification is notified by means of the Companies (Accounting Standard) Rules , the Companies will not have to account for the proposed dividend and only disclose the same, the dividend will be accounted for only after approval of same in the AGM by the shareholders.
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CA MOHAMMAD SALIM
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