ACCOUNTING TREATMENT FOR DIVIDEND (2)

This week has been an exciting week so far. My last post on accounting treatment for dividend has generated a lot of readership, and comments, and also a lot of arguments with a junior colleague. I had a very good debate with my junior colleague on accounting for dividend. He argued that dividend should be reported in the statement of comprehensive income as an expense. I appreciate him for bringing out the debate. In a way, it enabled him to learn, and I also did further research to cement my points.

ACCOUNTING TREATMENT FOR DIVIDEND

Picture by thecorner.eu

This piece is inspired from my recent audit experience at a client office. The accountant of the client made two basic errors in accounting for dividend. So, let’s start with the errors. Say the company’s name is XYZ Ltd, and the financial year end I went to audit is 31 December 2015 (so the final audit happened say in April 2016). The two errors are:

1. During the year 2015, the company declared dividend for the financial year 2014. The accountant reasoned that since the dividend declared was for 2014 year results, it should be reported as 2014 transactions. So, he treated the dividend as a prior year adjustment for 2014 (since 2014 accounts have been finalised). 

2. The second error was that during the year 2016 (before our final audit), the company declared dividend for 2015 year results. The accountant, following the rationale explained in error 1 above, reported the dividend as an expense in the financial records for 2015.

Now, before going into the solutions for error 1 and 2 above, let us discuss the basics of what dividend is.

ACCOUNTING FOR RESTORATION COST…

As an auditor or a company accountant, one needs to take note of the agreement of any leased property/building. If the terms of the lease require the company to restore the building to its former state, then, restoration cost needs to be factored into the cost of the property/building. The same still applies even if the building is not leased. If constructed or bought and it is required, legally or constructively, to restore the site to its former state, then restoration/decommissioning cost should be accounted for.

Recognition and Measurement

Only when there is a legal or constructive obligation to restore a building/property/site is restoration cost recognized. The amount to be recognized would be a best estimate of what could be incurred. Since this involve an estimate, considerable judgement is required here. However, the estimate should be reasonable.

IMPORTANCE OF HAVING A PROFESSIONAL ACCOUNTANT

Starting a business is no small task, and to keep the business afloat is even harder. For this reason, you would expect that entrepreneurs will make getting a professional accountant paramount, but alas, that is not always the case. My years of experience have shown that a lot of entrepreneurs do not consider having a professional accountant handle their books and financials until the business runs into a ditch. Just as a midwife is very important to a pregnant woman, so also is a professional accountant very key to an entrepreneur who is to birth a business, and even more important is the need for such a professional accountant throughout the years of the company, except you intend to run the business for just a year or so.