Dividend collection issues

The case

A consulting entity, called company A, purchased a portion of the equity of company B on 30 June 2021. At the end of 2021, company B reported profits of 200 monetary units, with half of these profits generated before the purchase by company A, and accumulated reserves of 300 monetary units at the end of 2020.

On 30 June 2022, the General Meeting of Shareholders of company B decided to distribute as dividends all of its 2021 profits, equivalent to 200 monetary units. By 2022, as of the date of such distribution, company B had accumulated profits of 150 monetary units.

Given this scenario, and based on the ICAC Resolution(*) of 5 March 2019, company A evaluates how to record the dividend it will receive, considering two main options:

• Take into account the profits generated from the date of acquisition of the shareholding until 31 December 2021, according to the last approved balance sheet.
• Take into account profits until 30 June 2022, the date on which the dividend is approved, which would imply recognising the entire dividend as income.
  • This option involves a number of additional considerations, such as the method of calculating earnings, whether to consider only the period up to the date of approval of the dividend or whether an interim balance sheet until the end of 2022 is necessary to confirm that earnings have actually been generated, how any unexpected events after the approval of the dividend would affect the calculation of earnings, how to proceed if a minority interest is held and no information on the earnings generated is available, and how interim dividends for 2022 would be treated prior to the approval of the ordinary dividend for 2021.

In terms of regulation:

1. The Capital Companies Act, dictates that the distribution of profits must be approved according to the final balance sheet.
2. Profits allocated directly to equity cannot be distributed.
3. Dividends cannot be distributed if the available reserves do not exceed the value of the R&D expenses capitalised in the balance sheet.
4. Dividends can only be distributed if equity does not fall below share capital after distribution.

On the interim dividend, it is stipulated that there must be a financial statement showing the availability of funds for its payment and limits the maximum amount to be distributed to the results of the last financial year, adjusted for previous losses and obligatory reserves.

The ICAC Resolution specifies that dividends accrued after the acquisition of shares shall be recognised as income when the right to receive them is declared, and those from results prior to the purchase shall reduce the book value of the investment.

In conclusion, Company A must record the dividend based on the results until 30 June 2022 (option b). An interim financial statement for 2022 is not necessary, and company A should use the information available up to the date of approval of the dividend. Unforeseen events after this date will not affect the accounting record already made.

If a 2022 interim dividend is anticipated before the 2021 ordinary dividend is approved, both will be considered simultaneously in the accounting. It is important to disclose all relevant information in the annual reports to accurately reflect the financial position and results of both companies.

If you have any questions regarding this issue, please do not hesitate to contact us, by telephone to Carles Monfort Codina or by e-mail to cmc@btsasociados.com, we will be pleased to help you.

(*)ICAC: Instituto de Contabilidad y Auditoría de Cuentas