Proposed dividends - the new rules

UK companies have always been able to relate dividends declared after the year end but before the signing of the accounts back to the previous year’s profit and loss account. However this is no longer an option under new rules effective for accounting periods beginning on or after 1 January 2005.

The change follows the introduction of Financial Reporting Standard (FRS) 21, Events after the Balance Sheet date, and a corresponding change in company law. The two now require that dividends declared after the balance sheet date should not be reported as a liability in the previous year’s accounts.

The practical effects of the change

The directors of a company meet on 1 March 2006 to discuss the accounts to 31 December 2005. On that date they declare a dividend of £1 per share for 2005. As the company’s year end had passed when the dividend was declared, the dividend cannot be included as a liability in the 2005 accounts. Instead the dividend will be disclosed in a note to these accounts.

In order for the dividend to be included as a liability in the 2005 accounts, the directors need to declare the dividend and either pay it or have it approved by the shareholders in general meeting before 31 December 2005. This requires the relevant statutory procedures to be followed. A directors’ meeting should be held and the declaration of the dividend should be minuted. This would then need to be followed by the payment of the dividend or the formal approval by the shareholders which will also need to be minuted.

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It would be possible for the dividend of £1 per share to be declared and properly authorised by the shareholders in December 2005 but not paid until March 2006 and the dividend still be included in the December 2005 accounts.

• This change only concerns the timing of the inclusion of the dividend within the company’s statutory accounts. It will have no effect upon when a dividend is actually paid to the shareholders. It will not have any tax consequences.
• If a company’s only income is a dividend from a subsidiary, the timing of the declaration and payment or authorisation by the shareholders of the dividend could be an important issue.
• If a company needs to ensure that part of its profit is distributed each year, the timing of the declaration of the dividend could be a particularly important issue this year. If no interim dividend has been paid, a dividend must be declared by the directors and paid or authorised by the shareholders by the year end in order for it to be included in the current year’s accounts.
• Finally, following the change in the rules, a prior period adjustment will have to be considered in the accounts for proposed dividends of previous years.

Please get in touch if you would like to discuss the new proposed dividend rules and how they may affect your company in more detail.