When Dividend Income is recognised as per Revenue Recognition principles?

Monday, November 23, 2009


IAS 18 - Revenue

Let's see what IAS 18 defines:

Paragraph 30 - IAS 18:"Revenue shall be recognised on the following basis:
dividends shall be recognised when the shareholder’s right to receive payment is established."

Now question comes up is - when "Right to receive Dividend" is established?

Before going further let's discuss about Types of Dividend.

There are two types of Dividend:
  • Interim Dividend - Declared and/or distributed before:
    - firm's annual earnings and
    - dividend-paying ability is accurately known by its management
    - generally paid in each of the first three quarters of the fiscal year
    - can legally be withdrawn on the discretion of the management
  • Final Dividend :-
    - Declared - as the last dividend declared in a given fiscal year.
    - Determined - after earnings have been determined and all financial reports are made.

Now in two types of dividend discussed supra, "Right to receive Dividend" is established at different stages as follows:
  • Interim Dividend - Only when it is paid (not when it is declared)
  • Final Dividend - As and when it is declared (though paid later)

Its Logic is as follows:
Paragraph 13 - IAS 10:Events after the Balance Sheet Date defines "Declared" as follows:
“If dividends are declared (i.e. the dividends are appropriately authorised and no longer at the discretion of the entity) after the balance sheet date.”

see italicizes words in above definition, which clearly states "no Longer at the discretion of the entity", means dividend is not exposed to chances of repudiation or withdrawal at a later date.
Now "Interim Dividend" can be withdrawn at a later date as it is based on estimated earnings for the year. See the definition of "Interim Dividend" quoted supra which states that it can legally be withdrawn on the discretion of the management because it is declared before dividend paying ability is accurately known by its management.
Thus in case of Interim Dividend "Right to receive Dividend" is established only when it is paid whereas in case of Final Dividend, right is established as and when it is declared.
But IAS 18 doesn't specifically state difference of treatement between Interim and Final Dividend.

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Anonymous said...

Keep posting stuff like this i really like it

Unknown said...

On other web pages, I got to see that Interim dividend cannot be revoked by the management of the company as the amount of dividend has to be deposited in the separate bank account within 5 days of declaration of dividend. So, by this logic, it looks like we have a right established to receive the dividend once it is declared.

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