wasima (Article Assistant) (24 Points)21 May 2015
Replied 02 June 2015
Schedule III of the companies Act 2013 deals with the presentation of any item in Financial Statements.
As per Schedule III, Proposed dividend is neither appropriated nor it is be shown under Reserves or Liability [Earlier in Schedule VI of Company Act 1956, Proposed dividend was appropriated and then shown under Current Liability]
However Para 8.5 of AS 4 "Contingencies and Events Occuring after the Balance Sheet date says that "There are few events which include the dividend proposed are sometimes reflected i.e. presented in Financial Statement because of statutory requirement even though they take place after the balance sheet date". Para 14 says Proposed dividend should be adjusted and as per para 8.1 such adjustments is to made to assets or Liability (as the case may be) at the balance sheet date (i.e. To be shown in LIABILITY in this case)
What was the statutory requirement:
Above para was introduced by ICAI to make AS 4 in line with Schedule VI of Co act 1956 (mind it: As on date old stat reqmt) i.e. to eliminate the difference of opinion. But later on MCA revised its old schdule VI and exactly same Revised schdule VI is incorporated in Schdule III of the new Companies Act 2013 which says it should neither be appropriated nor shown as Liability/Reserves as mentioned above. However Para 8.5 was never modified or updated in order to make As 4 in agreement with Companies act 2013.
Solution to Conflict Arises:
Schedue III of the companies Act 2013 gives the order of authority to apply AS if there is conflict on a particular item (here on Proposed dividend) on presentation in Financal statements.
Hence para 8.5 of AS 5 will prevail and Proposed dividend is to shown as Liabilty and we know that to show liablity, we have to appropriate first in Profit & Loss. Appropriations is to be done in Notes on Accounts prepared on 'Resreves in Surplus' sub heading of P&L i.e. to be deducted saying as 'Deletions'
As on date Proposed dividend is not regarded as Liability (as it has not been approved yet) BUT shown as a Liability due to technical interference by the AS.
CA fraternity is taking view of the Schedule III. Many renowned CAs have said that since Proposed dividend is not a Liability in nature, hence its presentation should also not be made under the head Liability and even institute in august 2012 had issued a Exposure draft on revised AS 4 in which para 8.5 have been deleted. [Link is https://22.214.171.124/28045expasb290912a.pdf]
Why Proposed Dividend is not a Liability in Nature:
An items should be regarded as Liability when it satisfies the 3 condition i.e. a) There must be present obligation, b) involving outflow of economic resources, c) which can be measured.
Proposed dividend do involves outflow of economic resources and also it can be measurable but obligation of same is not current i.e. it does not satisfies the 1st condition. It becomes obligatory when it is approved in AGM of the company which is usually happens after the balance sheet date.
As on balance sheet date, it is simply a recommendation by the Board and hence there no question of treating and even presenting it as LIABILITY.
Coming to your question: Treatment of Proposed Dividend in Consolidated:
See there are two words:
One is Treatment and second is Presentation. From your question I believe that you are wanting to know that how proposed dividend is shown or presented in Financial Statement prepared in accordance with Companies Act 2013 (i.e. as per schedule III) and that is why i have made the whole above discussion w.r.t presentation of Proposed dividend in balance sheet.
Ans w.r.t Presentation in nutshell:
In simple words, Consolidation Balance sheet is to be prepared in accordance with Schedule III of the Companies Act and as mentioned above, AS 4 will prevail w.r.t presentation of Proposed dividend due to authority given by the Schedule.
As per AS 4, it is to be shown as Liability. To be more specific, it should be shown under sub heading of "Other Current Liability" which lies under main heading of 'Current Liability'
But if I strictly go by the language you used in your question i.e. treatment of Proposed dividend, then in this regard i have already answered to a forum on same topic. Link is given below
Note: I know i have written alot, but for better conceptual understanding u need to liittle bid devote your time.
I hope i'll able clear what u wanting to gather.
Still please do not hesitate to leave doubts if any
Thanks and welcome for comments if any..