At the beginning of the year, when annual reports are prepared, there is one members’ meeting or general meeting after another and the owners define the amount of any dividend for the previous year. We have all become used to the Hungarian phenomenon that an annual report is prepared before the decision on the dividend, then another report is prepared after the members’ or general meeting including the dividend resolution, which defines the amount of the dividend for the previous year.
From this year, the dividend is included in the annual report for the year when the decision is made
Many will likely be surprised in Hungary that this year the situation is different, and finally, because of amendments to the Accounting Act effective from 1 January 2016, any dividend must be included in the annual report for the year the decision was made, in line with IFRS rules.
The last row of the income statement of 2016 annual reports is profit after tax; the category of balance sheet profit has been cancelled. From 2016, any dividend is accounted for as of the date of the dividend decision. Thus, a dividend determined by a subsidiary or associated company in 2017 for 2016 is not included in the parent company’s 2016 annual report. The 2016 annual report does not include the amount of the dividend defined by the parent company or the owners of the company in 2017 for 2016 either.
The dividend payable will decrease the retained earnings directly when the owners become liable for payment, while any dividend received (due) will still increase income from financial transactions as of when the dividend receivable is set. In Hungary this obviously changes the calculation of the amount available for a dividend payment, i.e. the free retained earnings supplemented with the profit after tax for the previous financial year can be used for a dividend payment; the sum of any dividend received (due) not yet included in the annual report for the previous financial year but accounted for before the balance sheet preparation date (i.e. included in a resolution by the subsidiary or associated company) increases the amount.
Dividend payment limit also changed
The dividend payment limit has also changed: the retained earnings supplemented with the profit after tax for the previous financial year may only be paid as a dividend if the amount of equity less the allocated reserve and any positive valuation reserve will not fall below the registered capital after the dividend payment. Naturally, the amount of any dividend received (due) and accounted for before the balance sheet preparation date can also be included in the amount of the equity.
The new dividend calculation requirements apply to the calculation of the amount available for any interim dividend too. However, the rule that an interim dividend can only be defined and paid based on an interim balance sheet or an annual report dated no earlier than six months has not changed.
Interim dividends could only be paid in the reporting year so far, primarily because the dividend was booked back to the balance sheet date of the reporting year. However, since the dividend is included in the books as of the date of the decision, there is no legal or accounting obstacle preventing payment of an interim dividend after the end of the reporting year but before the decision on the dividend is made.
In addition to the above, the change in the accounting of a dividend also affects undercapitalisation calculations since the dividend only decreases the equity underlying the calculations from the date of the dividend decision, not from the beginning of the year.
Review and reconsider
It is worth reviewing and reconsidering the calculation of the bonuses and premiums for managers and employees if these amounts used to depend on balance sheet profit. If a company has a bank loan, it is definitely necessary to review the limits (covenants) included in the loan contract along with the required equity ratios in light of the fact that from the 2016 financial year, equity as of the balance sheet date will include any dividend received and payable with a one-year delay compared to previous years.
Article related to the topic: Guidelines for decisions on dividend payments this year