Paper 3 · Statement of changes in equity / impairment
A company's directors propose a final dividend at the year end, but shareholders have not yet approved it at the annual general meeting. How should the proposed dividend be treated in the financial statements for that year?
ANot recognised as a liability in the financial statements, but disclosed by note, because no present obligation exists until shareholders approve it.
BRecognised as a current liability in the statement of financial position at the year end, because the dividend relates to profits already earned by the company during that year.
CRecognised as a non-current liability in the statement of financial position, because the dividend will only actually be paid out in a future accounting period.
DDeducted directly from share capital in the statement of financial position, because dividends reduce the funds that shareholders originally invested in the company.
Explanation: A proposed dividend that has not been declared/approved creates no present obligation, so it fails the definition of a liability and is only disclosed by note, not recognised in the statements.
Derived from ZIMSEC Accounting Paper 3, June 2019, Q1
