12 December 2014
Hi, I want to understand he difference in treatment of Proposed dividend, declared dividend, final and interim dividend and Dividend paid while preparing consolidated financial statements.
I have seen in some problems that while dividend paid is reduced from pre-acquisition profits(while doing analysis of profits), proposed dividend is not. However both of these are reduced from Cost of investment while preparing Cost of Control. Is my understanding correct? Can you please tell the reason for this difference in treatment.
On the similar lines I want to understand treatment for other dividends too listed above.
I have been struggling with this for a long time. Request your help.
02 August 2025
Great question! The treatment of various types of dividends in **Consolidated Financial Statements (CFS)** can indeed be confusing. Let me clarify the distinctions and why different treatments are applied:
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### 1. **Types of Dividends:**
* **Proposed Dividend:** Dividend recommended by the Board but **not yet approved** by shareholders.
* **Declared Dividend:** Dividend that has been **approved by shareholders** in the Annual General Meeting (AGM). Often used interchangeably with final dividend.
* **Final Dividend:** Dividend declared at the end of the financial year and approved by shareholders.
* **Interim Dividend:** Dividend declared and paid **before** the year-end and before finalization of accounts.
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### 2. **Treatment in Consolidated Financial Statements (CFS):**
| Dividend Type | Treatment in CFS | Explanation | | ----------------------------- | ----------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | | **Proposed Dividend** | Not deducted from Pre-Acquisition Profits | Proposed dividend is a **recommendation**, not an obligation yet. It does not reduce profits or equity till approved. But, when calculating Cost of Control (Investment), it is reduced to avoid overstating investment value. | | **Declared / Final Dividend** | Deducted from Pre-Acquisition Profits | Since it is declared and approved, it represents a **liability** and reduces retained earnings. Hence, deducted from pre-acquisition profits. Also deducted from Cost of Control as it reduces net assets. | | **Interim Dividend** | Deducted from Pre-Acquisition Profits | Interim dividends are paid and recognized as liability and reduce the equity base, so deducted from pre-acquisition profits and Cost of Control. | | **Dividend Paid** | Deducted from Pre-Acquisition Profits | Actual payment reduces net assets and profit base, so deducted accordingly. |
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### 3. **Why the difference in treatment?**
* **Proposed Dividend** is not a **legal liability** until approved, so it is not deducted from pre-acquisition profits (retained earnings) because the equity has not legally changed.
* When you calculate **Cost of Control** or **Investment**, you reduce the investment amount by dividends (whether proposed or declared) to avoid **double counting** of profits that will be paid out.
* **Declared/Final/Interim Dividends and Dividend Paid** are actual reductions in equity or net assets, so these reduce the net assets acquired and thus reduce pre-acquisition profits.
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### 4. **Summary:**
| Action | Proposed Dividend | Declared/Final/Interim Dividend | Dividend Paid | | ------------------------------------------- | ----------------- | ------------------------------- | ------------- | | Deducted from Pre-acquisition profits? | No | Yes | Yes | | Deducted from Cost of Control (Investment)? | Yes | Yes | Yes |
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### 5. **Additional Notes:**
* In some problems, **proposed dividend** is shown as a note or liability only after approval in AGM. * The logic behind deducting dividends from Cost of Control is to **adjust the investment value** for amounts paid out and not part of net assets acquired.
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Would you like me to illustrate with a numerical example for better understanding?
CAclubindia
