Although we are getting close to the end of the process for preparing, accepting and publishing financial statements, it is not a bad idea to bear some new aspects in mind in this context.
As we already know, the Accounting Act changed as of 1 January 2016 in the sense that dividends approved by owners are not presented in the previous year’s financial statements (2016 in this case), and instead are used to reduce the retained earnings in the year the dividend decision is made. We looked in detail at the accounting aspects of these changes in an earlier article entitled “What can a dividend in Hungary be paid from?” However, the underlying legislative changes have additional impacts on disclosures in the supplementary notes and on owner decisions accepting the financial statements, and these need to be considered when opting for dividend payments.
What should you look out for when accepting financial statements?
Resolving to pay dividends is still only possible when accepting financial statements. Yet there is no longer any need to make a statement on using the profit after tax because, irrespective of the dividend decision, this is first transferred into the retained earnings when the accounts are opened for the following year, and only on the day the dividend payment decision is made does the company reduce its accumulated profit, the retained earnings. In this respect it is no longer appropriate to speak about using year-end after-tax profit or distributing year-end profit.
Dividend payments – what can be paid and when?
The previous year’s unallocated retained earnings supplemented with the profit after tax can be paid out as a dividend. The previous regulation stated the exact opposite. Dividends could be paid from the reporting year’s profit after tax, and the reporting year’s profit after tax supplemented with the unallocated retained earnings. This may seem like a subtle change, but it has to be reflected in the decision accepting the financial statements.
Recommended changes in decisions accepting financial statements
Owing to the legislative amendments we recommend making the following changes to the wording of decisions accepting financial statements:
- We should no longer use the phrase profit or loss for the year, instead, profit after tax should be adopted as the indicator of how successful our activity is.
- It is not accurate to say that the owner decides on placing the profit after tax into the retained earnings, because this is prescribed by the Accounting Act, it is no longer subject to a decision.
- A company does not pay a dividend primarily from profit after tax. It suffices to say that the owner has decided to pay a dividend of THUF XXX. In actual fact, the dividend is paid from the retained earnings because under accounting rules any profit after tax from the previous year has to be recognised as an addition to the retained earnings on the first day of the financial year (1 January 2017), and when making a dividend decision for example on 15 May 2017 only the retained earnings has to be reduced with the dividend payment liability to the founders.
- If no decision is made by the owners as regards dividend payments, then we recommend the following wording: When accepting the financial statements the company’s owners made no decision on paying dividends.
What should be included in the notes in this respect?
Based on the Accounting Act, the supplementary notes still have to present the proposal on use of the profit after tax. This provision is somewhat contradictory to the information above and to the legal stipulation that the retained earnings can be paid as a dividend, supplemented as applicable with the previous year’s profit after tax; it is not the profit after tax that is distributed like before. We assume the legislator intended for the management’s proposal on using the profit to be presented in the financial statements, since it is the management that submits the proposal for the owner’s decision on paying a dividend.
When disclosing such information in the notes we recommend following the above approach, which means it is enough to inform the readers of the financial statements that the management proposes a dividend payment of THUF XXX. It is definitely worth adding that the management’s proposal has not yet been approved by the owner. Given that this is not a proposal on the final dividend payment, and the decision on the actual dividend is only adopted after the financial statements are prepared, the owner’s decision can deviate from the proposal. Furthermore, since the dividend is not included in the financial statements, only in the owner’s decision accepting the financial statements, having the management proposal in the financial statements could even be misleading. This is why we recommend being prudent and careful when wording any disclosures in the notes about the dividend proposal.