The pre-revised Schedule VI specifically required proposed dividend to be disclosed under the head ‘Provisions.’ The revised Schedule VI requires separate disclosure of the amount of dividends proposed to be distributed to equity and preference shareholders for the period and the related amount per share. It also requires separate disclosure of the arrears of fixed cumulative dividends on preference shares. Thus, under the revised Schedule VI, dividend proposed needs to be disclosed in the notes. Hence, a question that arises is whether this means that proposed dividend is not required to be provided for when applying the revised Schedule VI?
There are two views on this matter.
View 1 View 1 is based on paragraph 8.8.7.7 of the ‘Guidance Note on the Revised Schedule VI to the Companies Act, 1956’ and paragraph 14 of AS-4 (see below). It states that AS-4 ‘Contingencies and Events Occurring After the Balance Sheet Date’ require that dividends stated to be in respect of the period covered by the Financial Statements, which are proposed or declared by the enterprise after the balance sheet date but before approval of the financial statements, should be adjusted. Keeping this in view and the fact that the Accounting Standards override the revised Schedule VI, companies will have to continue to create a provision for dividends in respect of the period covered by the financial statements and disclose the same as a provision in the balance sheet, unless AS-4 is revised.
Thus as per the Guidance Note a provision for proposed dividend is required, though there is no present obligation at the balance sheet to pay dividends. This is because of the specific requirement of paragraph 14 of AS-4.
View 2 The following two paragraphs deal with proposed dividends under AS-4.
8.5 There are events which, although they take place after the balance sheet date, are sometimes reflected in the financial statements because of statutory requirements or because of their special nature. Such items include the amount of dividend proposed or declared by the enterprise after the balance sheet date in respect of the period covered by the financial statements.
14. Dividends stated to be in respect of the period covered by the financial statements, which are proposed or declared by the enterprise after the balance sheet date but before approval of the financial statements, should be adjusted.
The requirement to provide for proposed dividend established in paragraph 14 should be read along with paragraph 8.5. When read together, some argue that the requirement to provide for proposed dividend exists in AS-4 only because of a statutory requirement (pre-revised Schedule VI). Hence, proposed dividends not required to be provided for under revised Schedule VI, should not be provided for even if paragraph 14 of AS-4 is not withdrawn or amended.
Author’s view The author believes that the requirement to provide for proposed dividend is expressly required under paragraph 14 of AS-4 and hence proposed dividend should be provided for. Nonetheless, view 2 has some merits and reflects the intention of the standard-setters. Thus view 2 may be an acceptable view, subject to clarification by the ICAI. In any case, the ICAI should take immediate steps to amend paragraph 14, to state that proposed dividends are not required to be provided for at the balance sheet date. This will also bring us in line with International Financial Reporting Standards.
