Chapter 2:

When to recognise a dividend

The liability to pay a dividend is recognised when the dividend is appropriately authorised and no longer at the discretion of the entity, which is the date:

• when declaration of the dividend (e.g., by management or the board of directors) is approved by the relevant authority (e.g., the shareholders) if the jurisdiction requires such approval; or
• when the dividend is declared (e.g., by management or the board of directors) if the jurisdiction does not require further approval.

As explained, the principle that a dividend is recognised when it is appropriately authorised and no longer at the discretion of the entity was previously in IAS 10 but has been removed as a consequential amendment of IFRIC 17. The reasons for this are given in IFRIC 17 which explain that the Interpretation did not change the principle as to when to recognise a dividend payable.

The principle was moved from IAS 10 into the Interpretation and clarified but without changing the principle. The ‘declaration’ of a dividend by management does not, therefore, result in a liability when that decision is subject to further approval or when management retains discretion to reverse its decision.

Measurement of a dividend payable

A liability to distribute a non-cash asset to owners should be measured at the fair value of the asset to be distributed.

If the owners of the entity are given a choice of receiving either a non-cash asset or a cash alternative, the liability for the dividend payable is estimated by considering both the fair value of each alternative and the associated probability of owners selecting each alternative.

The carrying amount of the dividend payable is reviewed and adjusted at the end of each reporting period and at the date of settlement. Any changes in the carrying amount are recognised in equity as adjustments to the amount of the distribution.

Accounting for any difference on settlement

The difference, if any, between the carrying amount of the assets distributed and the carrying amount of the dividend payable is recognised in profit or loss when the dividend is settled.

When the fair value of the asset is higher than it carrying amount, the application of IFRIC 17 results in the recognition of a profit when the dividend is settled. It will be less usual for a loss to arise. If the fair value of the asset is less than it carrying amount, it will often have been written down for impairment prior to the distribution unless, depending on the nature of the asset, a higher value in use could be justified.

Presentation and disclosure

The difference arising on settlement of the dividend should be presented as a separate line item in profit or loss.

The following information should be disclosed, if applicable:

• the carrying amount of the dividend payable at the beginning and end of the period; and
• the increase or decrease in the carrying amount recognised in the period in accordance with IFRIC 17 as a result of a change in the fair value of the assets to be distributed.

If, after the end of the reporting period but before the financial statements are authorised for issue, an entity declares a dividend to distribute a non-cash asset, the financial statements should disclose:

• the nature of the asset to be distributed;
• the carrying amount of the asset to be distributed as at the end of the reporting period;
• the estimated fair value of the asset to be distributed as at the end of the reporting period, if different from it carrying amount; and
• the information about the method(s) used to measure that fair value required by IFRS 13.

Presentation of stock or scrip dividends

Companies sometimes issue shares as an alternative to a cash dividend. This is often termed a ‘stock dividend’, a ‘share dividend’ or a ‘scrip dividend’. Shareholders are usually offered a choice between a cash dividend and a stock dividend alternative. When the dividend is structured such that it is probable that most of the shareholders will decide to take the shares, because the market value of the share alternative is above the cash alternative, the dividend is referred to as an ‘enhanced stock dividend’.

Stock dividends may take different legal forms in different jurisdictions. How they affect, for example, distributable reserves and the balance on the share premium reserve will be governed by local legal requirements.

Pure stock dividends (i.e., those without a cash alternative) do not result in a reduction in equity and are not, therefore, strictly ‘distributions to owners’. The statement of changes in equity will, therefore, show no net movement for a pure stock dividend.

However, when shareholders have a choice between receiving cash and receiving shares, this will typically involve a distribution to owners. IFRS Standards do not include any specific guidance on the appropriate accounting in such cases, but the choice of accounting policy may be restricted by local legal or regulatory requirements.

One common approach is for the dividend to be shown in the statement of changes in equity, or the note required by IAS 1, at its full ‘cash equivalent’ amount, irrespective of the extent to which shareholders choose to receive shares rather than cash. When the dividend is presented at its ‘gross’ or ‘full’ amount in this manner, there will also be a credit item in the statement of changes in equity to reflect the stock element of the dividend.

The notes to the financial statements should provide an explanation of the stock dividend and the policy adopted to account for it. In the absence of clear guidance, other approaches may also be acceptable.

Capital contributions and deemed distributions

Nature of capital contributions

The term ‘capital contribution’ is not defined in IFRS Standards but is generally accepted as meaning a contribution by owners (i.e. a gift made to an entity by an owner which increases the entity’s equity without any obligation for the entity to make repayment or to do anything in consideration for receiving it). Capital contributions are most often made by parent entities to their wholly-owned subsidiaries but they may be made in other circumstances.

For example, a majority owner might make a capital contribution to an entity in some situations, even though this would result in the benefits being shared with the other owners.

The term ‘capital contribution’ may be used in some jurisdictions to include arrangements allowing for the contribution to be returned in certain circumstances. The assessment as to whether such a contribution is classified as a liability or as equity is made in accordance with IAS 32. For the purposes of the analysis below, it is assumed that the contribution is classified as equity in accordance with IAS 32.

Capital contributions are sometimes made for the purpose of improving the financial position of a subsidiary by increasing its net assets without formally increasing its issued share capital (e.g. so as to improve its credit rating).

However, in some jurisdictions, capital contributions often serve another purpose which is to eliminate a deficit on distributable profits so that the payment of dividends can be resumed. This may not be achievable by an issue of shares.

Not all non-arm’s length transactions between an entity and its owners are in the nature of capital contributions (or distributions). IFRS Standards do not impose a general requirement to reflect the fair value of such transactions although they require disclosure of related party transactions. Whether a particular transaction should be recognised as a capital contribution is a matter of judgement in the context of the particular facts and circumstances.

Accounting for capital contributions by the recipient

A capital contribution should not be included in profit or loss for the period, nor within other comprehensive income. Instead, it should be presented in the statement of changes in equity (i.e. similar to the proceeds of a share issue). This is because the increase in shareholders’ funds is not ‘income’ as defined in the Conceptual Framework. The Conceptual Framework defines income as follows:

“Income is increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims.”

Therefore, income cannot result from ‘contributions from holders of equity claims’.

Accounting for capital contributions by the donor

There is no formal financial reporting guidance on the treatment of a capital contribution by the donor (parent) entity, although it is usually capitalised as part of the cost of investment. This is reasonable because, all other things being equal, the net assets of the subsidiary and, therefore, its value as an investment, will have increased by the amount of the contribution.

However, when the investment is accounted for at cost, it is important to consider whether the investment has suffered an impairment, particularly if the reason for making the contribution is to eliminate the effect of losses made by the subsidiary. An impairment loss should be recognised in respect of the investment, if necessary.

Waiver of intragroup debt

Waiver of intra-group debt as a capital contribution

A capital contribution can arise from the waiver of a debt due by a subsidiary to its parent or through the assumption of the subsidiary’s liabilities by the parent.

A capital contribution can also arise if a subsidiary waives debt due from a fellow subsidiary in the same group. In this case, the waiver of the intragroup debt in one subsidiary is in effect a dividend up to the parent and a subsequent capital contribution from the parent to the fellow subsidiary.

While each case should be considered based on the specific facts and circumstances, such transactions should generally be viewed as capital contributions unless there is clearly some other commercial purpose.

Waiver of intra-group debt – determining the amount waived

The actual amount of debt waived is determined by considering the specific circumstances. For example, in the case of an interest-bearing loan, the amount waived may consist of any principal not yet repaid together with any unpaid interest that has accrued up to the date of waiver. It would not be appropriate to recognise further interest income or expense on such a loan after it has been waived.

Accordingly, it is important to establish the date on which the waiver was actually granted, based on a careful assessment of the facts, in order to establish the date on which the capital contribution should be recognised. Separately, the lender should consider whether the loan was already impaired and, if so, recognise any associated impairment loss before accounting for the waiver. (For further discussion of the appropriate accounting entries.)

More generally, when a waiver or gift relates to a recent transaction, care should be taken to consider whether the waiver should be accounted for as the reversal of that recent transaction or as a capital contribution. Transactions that are conducted on a non-arms’ length basis should be considered on a case-by-case basis to determine whether they result in a capital contribution. It will not usually be appropriate for the borrower to record credits in profit or loss as a result of a waiver of intragroup debt.

Capital contribution made by a parent to a subsidiary as part of a group share-based payment arrangement

When a parent enters into a share-based payment arrangement with employees of its subsidiary and the parent has the obligation to those employees, the subsidiary in its own financial statements measures the services received from its employees in accordance with the requirements of IFRS 2 for equity-settled share-based payment arrangements. A corresponding increase is recognised in equity as a capital contribution from the parent. The accounting by entities within groups for share-based payment arrangements is addressed in section 8 of chapter A16.

There is no requirement within IFRS Standards to credit the capital contribution to a separate component of equity but this may be affected by local legal and regulatory requirements.

Deemed distribution – interest-free loan from a subsidiary to its parent

Deemed distribution: interest-free loan from a subsidiary to its parent – example

A subsidiary, Entity S, advances an interest-free loan to its parent, Entity P. The loan is repayable in three years with no option for Entity P to repay the loan in advance of that date or for Entity S to demand early repayment.

IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39) requires a financial asset (other than a trade receivable that is determined in accordance with IFRS 15 not to have a significant financing component) to be recognised initially at its fair value. Because Entity S’s loan to Entity P is interest-free (and, therefore, not on market terms), the fair value of the loan at initial recognition will be lower than the amount of cash advanced to Entity P.

The difference between the cash advanced to Entity P and the fair value of the loan should be recognised by Entity S as a distribution to Entity P.

The advancement of a loan at a preferential rate of interest is, in substance, a distribution from Entity S to its parent because it reduces the shareholders’ funds of Entity S but does not meet the definition of an expense in the Conceptual Framework. The Conceptual Framework defines expenses as follows.

“Expenses are decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims.”

Therefore, an expense cannot result from ‘distributions to holders of equity claims’.

A ‘deemed distribution‘ such as this should be presented in the statement of changes in equity (in the same way as any other dividend).

Entity S will recognise interest income in profit or loss using the effective interest method as the discount applied to the cash receivable on maturity of the loan unwinds.

Statement of cash flows

A statement of cash flows is required in all financial statements prepared to comply with IFRS.

Notes to the financial statements

Structure

An entity discloses the following in the notes to the financial statements:

• Basis of preparation and accounting policies adopted in the preparation of the financial statements.
• Information required by IFRS that is not presented in the primary statements.
• Additional information that is not presented in the primary statements, but is relevant to an understanding of those statements.

An entity should systematically present the notes. The entity should consider the effect on the understandability and comparability of its financial statements in determining a systematic manner. Each item in the primary statements should be cross-referenced to any related information in the notes.

The notes contain more detailed analysis of amounts shown on the face of the primary statements, as well as narrative information. They address disclosure requirements of other standards and interpretations, and they disclose any other information that is necessary to achieve a fair presentation of the financial statements.

The following are examples of systematic ordering or grouping of the notes:

• Giving prominence to areas of its activities that the entity considers to be most relevant to an understanding of its financial performance and financial position, such as grouping together information about particular operating activities;
• Grouping together information about items measured similarly, such as assets measured at fair value; or
• Following the order of the line items in the statement(s) of profit or loss and other comprehensive income and the balance sheet, such as:

>A statement of compliance with IFRS.

>Information about the basis of preparation and the specific accounting policies selected and applied for significant transactions and events.

This might be presented as a separate component of the financial statements. Information relating to line items presented on the face of the financial statements. Each financial statement item should be cross-referenced to the appropriate note.

Such notes should, as far as possible, follow the order of the items in the financial statements. Other disclosures, including contingencies, contractual commitments and other financial disclosures, as well as non-financial disclosures.