Dividends and Going Concern after the Reporting Period

Understand Dividends and Going Concern after the Reporting Period

Key rules to remember

Dividend declared after the reporting period

Declared after period end → no liability at reporting date; disclose in notes

Paragraphs 12 and 13. Applies to dividends to holders of equity instruments, declared before the financial statements are approved for issue.

Dividend declared on or before the reporting date

Declared (and authorised) by reporting date → liability recognised

A present obligation exists, so it is not covered by the rule above. Use the date of authorisation to decide.

Going concern test

Intention to liquidate or cease trading, or no realistic alternative → not a going concern basis

Paragraph 14. Management's determination after the reporting period is enough.

Effect of failing going concern

Change in the basis of accounting, not adjustment of amounts

Paragraph 15. Do not just write down a few assets and carry on.

Going concern disclosures

Not going concern basis, or material uncertainty → disclose as per Ind AS 1

Paragraph 16. Applies even where the uncertainty arises after the reporting period.

How to solve Dividends and Going Concern after the Reporting Period questions

1. 1Write down the reporting date and the date the financial statements were approved for issue.
2. 2Find the date of declaration or authorisation of the dividend, or the date of the going concern event.
3. 3Check that the event falls between the reporting date and the approval date. If it falls after approval, Ind AS 10 does not apply.
4. 4For a dividend declared after the reporting date: do not recognise a liability, do not reduce reserves in that year, and disclose the amount in the notes.
5. 5For a dividend declared on or before the reporting date: recognise the liability and reduce retained earnings.
6. 6For going concern: ask whether management intends to liquidate or cease trading, or has no realistic alternative. If yes, state that the going concern basis is inappropriate and the basis of accounting must change.
7. 7If the situation is only a material uncertainty, keep the going concern basis but disclose the uncertainty as required by Ind AS 1.
8. 8Conclude with the treatment, the journal entry if any, and the note disclosure.

Quickest way: Date test and intention test

Common mistakes in Dividends and Going Concern after the Reporting Period

• Recognising a proposed dividend as a liability in the year the profit was earned.

  Students follow the old AS 4 habit of providing for proposed dividend.

  Fix: Under Ind AS 10, a dividend declared after the reporting period creates no liability at that date. Disclose it in the notes.

• Treating a dividend declared after the reporting period as an adjusting event.

  Students link it to the year's profit and assume it confirms a condition at the reporting date.

  Fix: No obligation existed at the reporting date, so the standard prohibits recognising it. Disclose only.

• Forgetting to disclose the dividend in the notes.

  Students focus on the no-liability rule and stop there.

  Fix: Always add that the dividend is disclosed in the notes in accordance with Ind AS 1.

• Adjusting asset values and keeping the going concern basis after a decision to liquidate.

  Students treat it like an ordinary adjusting event.

  Fix: The effect is pervasive. The standard requires a fundamental change in the basis of accounting, not adjustment of amounts.

• Concluding that going concern fails because of a loss after the year end.

  Students read paragraph 15 as a rule, not a prompt.

  Fix: Deterioration only indicates a need to consider the assumption. Paragraph 14 sets the actual test: intention to liquidate or cease trading, or no realistic alternative.

• Applying the rule to events after the approval date.

  Students ignore the approval date given in the question.

  Fix: Ind AS 10 covers events only up to the date the financial statements are approved for issue.

Worked examples