Hello Prachi
Let me try to make u understand
General Rule:Final Dividend is generally proposed for a particular year after recommendation in Board meeting based on 31st march net results. As per AS 4 it should be adjusted in Current year financial statement even though it's a non adjusting event and to be shown in Sub heading 'Other Current Liability' of main head Current Liability in balance sheet prepared in accordance with Schedule II of company act 2013.
[Why Non Adjusting: Except dummy candidate, we all know the fact that accts for current year is not prepared and approved exactly by 31st march. Its take time. Further on balance sheet we do not know whether dividend is proposed or not. This is becoz Borad meeting is conducted mainly in month of april to may to decide proposal. If BM is conducted before march then well n gud, then its mandatorily need to provide for Proposed dividend. But if not conducted then AS 4 says, even it becomes a non adjusting event, it should mandatorily be adjusted in that yr accounts itself.]
DIVIDEND PROPOSED & adjusted in last year is to be paid in Current year (within 30days of proposal). Then this is regarded as Dividend paid.
Now for the pupose of Sums (academic Purpose): In sums when a dividend paid is given, then institute in all sums assumed that it has been proposed in current year and paid in current year itelf (going against the general rule).
So when a dividend paid is given , we need to identify year (Source) for which it has been paid.(this identification is required in step 3 discussed below)
Step 1;In AOP (Analysis of Profits), it may so happen that u are analysing more than 2 year by comparing opening and closing profits. If dividend has been paid between these yers, it has to be added back (becoz we need to calculate profits before adjustment of dividend (there may be other items like abnormal loss,etc), obvioulsy we will deduct dividend paid by reducing profits, but will do after adjusting profits in accordance with Time).
Now question where to add back..i mean in Capital Profit (called pre) or in Revenue Profit (called post). The anwer to this question depends on sums where we got to know where the profits for div proposed & paid is reduced. As told above that ICAI unless specifiaclly p&L account or specifc info is not given, it is assumed to be proposed and paid both made in current yr. It means it has been reduced in current by reducing cy profits. so it shouls be added back in Current yr profits i.e. post Profits i.e. Revenue Profits. (Since capital profit is past yrs profits).
Step2: Now apply Time adjustments i.e. adjust profts before dividend (there may be other items also) accoring to time or period falls in post period and pre period of acquisition of shares.
Step 3: Now its time to reduce dividend paid again which we nullified earlier. Now answer to this ques depends on YEAR for which it pertains to or has been paid.
Following type of language may be given:Date of purchase of shares 01.04.14
" The Profit and Loss A/c showed cr balance of Rs ...on 01.04.14. Out of which a dividend pf 10% was paid on 01.08.14'
This 'out of which' language does not mean that it has been deducted or more clearly proposed in Previous yr accounts (i.e in 13-14). It's telling the source or year for which dividend pertains to. (Obviously proposed and paid in current yr i.e. 14--15 due to assumption running in background but dividend is pertains to 13-14)
So for answer to step 3 is: Dividend though proposed and paid in current year but it pertains to Yr 13-14(i.e. previous yr), so it should be deducted or reduced in pre profits (i.e. Capital Profits) calculated after time adjustments.
Be careful while deducting, it may so happen that the company had purchsed shares on 30.09.13(in 13-14), in that case dividend paid is again to be deducted according to time i.e. 6months pre, 6m post).
ABOVE DISCUSSION IS FOR FINAL DIVIDEND PAID.
Now 2nd situation where Proposed dividend is given in Standalone Balance sheet or question gives the information for proposing dividend for current yr.
In such a situation, no assumption is reqd. it is very much clear that it has been proposed in current and to be paid in next yr.
Step 1: Case a: P.Div shown in B/sheet: In AOP, since adjusted in B/shhet, Profits have been reduced, now add back in Revenue Profits (since adjusted in current yr accounts, simply apply above rules)
Case b: P/Div is yet to shown in B/shet: In AOP, not reqd. to add back (since Profits not yet reduced, so why to inflate)
Step 2 simply apply Time adjustments
Step 3: Need to reduce where it pertains to. Obviously, this proposed dividend is pertains to current yr, so it should be dedcuted in current yr.
Now coming to your original quest:
See for common parlance:
the word recommendation: means it has been proposed
the word declared: means it has been paid
To summarise: there may be two types of Final and Interim. Final dividend proposal and its Payment is discussed above:
For interim dividend, it is recommended by board in between the running year. It is first deducted in revenue profits in AOP and apply time adjustments, then deduct according to date of purchase of shares. Say for ex: interim dividend of Rs 70000 is paid in 31.10.14. Date of Purchse of shares is 30.06.14, then full amt is first added back, apply time adjustement for profits, deduct interim dividend 70000x 3/7 = 30000 in pre period, balance 40000 in post period.
For Cost of Control: Always check the sum total of dividend deducted in Capital Profit (say 10000) from AOP. Out of such total, check how much the holding company received after purchase of shares by it (say 7000). Now remind AS 13 all dividend received which is given out of pre acquistion profits are to be not to be treated as income. It should be reduced from Investments.
Since we are taking dividend receipt from capital profits coloumn,
Entry will be;1. Bank to Divi received 7000 this is only pre div, there may post also
2.Div received A/c 7000 + post div
To Investments (given from pre acq Profits part) 7000
To P& L A/c Post Div amt.
In sums, whenver dividend is received out of pre, unless specifically told, it has been treated incorreclty, i.e. it has wrongly credited to P& l a/c. So we need to rectify.\
Entry will be Investment a/c Dr.
To P&L A/c
In Cost of Conttrol, we keep Investments, so we direclty rectified there only by reducing Cost of control. This treatment we do for both interim & Final if treated wrongly (i.e. in absence of Info)
I'hv tried to incorporate evry doubts that may arise. Still if u r facing prb, then post ur comments here without any hesitation.
Hope i'll be able to clear ur doubts.
Thank you
Regards
CAclubindia
