Anticipated dividends

[asousa87]

Hello.

One question: how do you recognize antecipated dividends to paid to an Holding?
As equity or profit and loss?

For example, company A will pay to company B (Holding) an antecipated dividend of 1,000m.
Is recognized as equity of profit and loss?

Regards.
Artur.

[Marek Muc]

Are you asking about the perspective of entity A or B? If B, separate or consolidated financial statements and how A is accounted for?

[asousa87]

Sorry for short info.

Company A, individual financial statements.

Regards.
Artur.

[pub_acco]

Dividends paid directly reduce equity unless they are related to certain types of preference shares.

[Marek Muc]

Ps. What do you mean when you say 'anticipated' dividend?

[asousa87]

For example, you will distribute dividends in 2020 regarding the net income of 2020.

Normally, at least here in Portugal, the distribution is made after the year is closed, and therefore the bookings in the company that distribute are in equity (as a decrease of retained earnings).

Now, for example, lets assume that a company already distributed all the net income allowed and therefore the Retained Earnings is zero in 2020.
However, this company must send cash to the holding (and lets assume that dividend is the most efficient way to do it). In a normal case, the board will wait until the end of year and the accounts approval and the deliberate the dividends (in this case somewhere in March - April 2021).

Is this particular case, the dividends must be distributed this year (2020) regarding the net income of (2020) until the date of the deliberation.

(all this exercise is made in the perspective of the company that distribute the dividend).

[Marek Muc]

Dividends are distribution of profits. As you don't have any accumulated profits, this will rather be some other type of equity withdrawal. Anyway, a debit to equity.

Btw, does your corporate law allow to pay dividends in such circumstances?

[asousa87]

Ok, i see you point.
But in the standards i was not able to find what is the treatment for this; is like as grey area.

Yes, our corporate law allows this kind of distributions. And i know some other countries that also allows, for example Brazil.

[Marek Muc]

IAS 32.35 is probably the closest you can get

[nguyenlong]

It's a transaction between a company and an owner in their capacity as owner and hence, the transaction is not qualified as an expense (IAS 1).

You should reduce the amount of the company equity, but only when you already have the obligation to pay the money. In this case, it is the withdrawal of contributed capital.

In some cases, the company might be able to require the owner to pay back the "temporary dividend" received. In my opinion, it's in the nature of a loan to shareholder instead of a distribution of dividend.

[asousa87]

Sorry for the delay.

IAS 1 indeed answer directly to the question.
Thanks a lot.

Regards.

[asousa87]

One additional question: some countries, such as Brazil, allows the subsidiary to pay an interests to parent company related with share capital (in simple terms).
For example, subsidiary has a share capital of 1,000 Eur and the allowed interest rate is 1% (example).
So, each year, the subsidiary recognize an expense with interests related with share capital, and the parent company recognize an income related with interests.

Question: if we follow the text of IAS, this interest expense in subsidiary should be classified as Equity?

Regards.

[Marek Muc]

that is interesting! is the subsidiary *allowed* or *required* to pay this interest?

if allowed, then it's rather similar to dividends, and any payments on equity instruments should be debited to equity, so no finance costs

if required then, well, it's not equity at all

[asousa87]

It is a good point of view.
For Brazil, for example, it is allowed...

Thanks.
Regards.

[Marek Muc]

ok then a debit to equity, not an interest expense
https://ifrscommunity.com/knowledge-bas ... -and-gains