Dividend Payments

This topic has 3 replies, 2 voices, and was last updated 2 months ago by MikeLittle.

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June 12, 2022 at 12:11 pm #658545
TMaC123
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Hi Mike,

I came across this statement in and don’t fully understand it:

Plcs can only declare dividend if net assets will not fall below total of called up share capital and undistributable reserves

Could you help explain it in simple terms?

Does it mean that net assets (total assets – total liabilities) have to be greater than share capital called up (I think this is allotted SC less any liabilities on partly paid shares) plus undistributable reserves (share premium, revaluation surplus, etc). So this figure would always be greater unless the business has been making losses? I think I’ve just confused myself further trying to figure it out…
June 12, 2022 at 8:06 pm #658577
MikeLittle
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You’re absolutely correct! Where a company has an Accumulated Deficit in Distributable Reserves ( normally just the Profit or Loss Account but also including such reserves as a General Reserve) then it is illegal for that company to declare / pay a dividend where, as a result of that dividend, net assets would fall below the subtotal of Share Capital + Undistributable Reserves

Imagine we have Share Capital 100, Share Premium 20, subtotal 120, General Reserve 30, Profit or Loss Account (10) and a total of $140

TNCA of 100, CA of 60 and CL of 20 with a total of $140

And we would like to pay a dividend of 25 financed by the General Reserve ie Debit General Reserve and Credit Cash 25 General Reserve goes down to 5 and CA goes down to 35

Share Capital still 100, Share Premium still 20, subtotal still 120 General Reserve is now 5 and profit or Loss Account is still (10) with a total of $115

TNCA still 100, CA is now 35, subtotal 135, CL 20, total net assets $115

BUT!!! Net Assets of $115 is now lower than the subtotal of Share Capital + Undistributable Reserves $120

And that’s not allowed!

OK?
June 14, 2022 at 11:03 pm #658753
TMaC123
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Thanks Mike, your explanation makes it really clear. I think I was half way there but now fully understand it.

Cheers,
Thomas
June 15, 2022 at 7:42 am #658784
MikeLittle
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You’re welcome
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