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.

• Conceptual framework definition of expenses:  

According to the conceptual framework for financial reporting, expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, OTHER THAN THOSE RELATING TO DISTRIBUTIONS TO EQUITY PARTICIPANTS.

From the definition, dividend is clearly not an expense for the fact that it is a distribution of earnings of a company to the shareholders in their capacity as owners of the company. 

Also, from the conceptual framework, expenses and income are two elements that determine the financial performance of a company. And since, dividend is only recommended once a favourable performance (profit) has been established (as it is against the norm to declare dividend out of a loss), dividend cannot therefore be recognised as an expense.

• What IAS 1 says

According to IAS 1 (Presentation of financial statements), a statement of changes in equity should include transactions with owners in their capacity as owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control.

Furthermore, the standard requires that an entity shall present, either in the statement of changes in equity or in the notes, the amount of dividends as distributions to owners during the period, and the related amount of dividends per share.

Remember to comment, share and like. If you have any question bordering on this topic or any other topic in accounting, feel free to drop them in my mail or right here in the comment box.

Written by Abayomi Samuel.