A company's board of directors declares a final dividend on 10 March, several weeks after its 31 December reporting date, and before the financial statements for the year ended 31 December are authorised for issue. No obligation to pay the dividend existed at 31 December. Under IAS 10, how should the dividend be reflected in the financial statements for the year ended 31 December?
- Recognised as a liability at 31 December, because the dividend relates to that year's profit
- Not recognised as a liability at 31 December; instead disclosed in the notes as a non-adjusting event
- Recognised as a liability at 31 December only if the dividend is later approved by shareholders at the annual general meeting
- Recognised as a reduction of retained earnings at 31 December with a corresponding restatement of the prior year's comparative figures
Why B? And why not the others?
Correct answer: B. Not recognised as a liability at 31 December; instead disclosed in the notes as a non-adjusting event
IAS 10 treats dividends declared after the end of the reporting period, but before the financial statements are authorised for issue, as a non-adjusting event: because no present obligation to pay existed at the reporting date, no liability is recognised at that date, and the dividend is instead disclosed in the notes. The option recognising a liability because the dividend relates to that year's profit confuses the period the dividend is drawn from with the period in which the obligation to pay actually arises; a liability can only be recognised once a present obligation exists, which here is after the reporting date. The option conditioning recognition on later shareholder approval at the annual general meeting does not change the analysis for this scenario, since the fact pattern already establishes that no obligation existed at the reporting date regardless of subsequent approval steps, and even a later approval would still be an event after that date. The option recognising a reduction of retained earnings with a restatement of comparatives misapplies the treatment for correcting prior period errors under IAS 8 to a routine subsequent dividend declaration, which is not an error and does not call for restating any prior period.
Source: IAS 10 Events after the Reporting Period, paragraphs 12–13 (dividends declared after the reporting period)