Changed rules on dividend payments from 2017 financial year

Although 2016 annual financial statements have already been adopted and published, we often hear owners ask: “When can I take out a dividend?” The Act on Accounting changed as of 1 January 2016 in the sense that dividends approved by owners are not presented in the previous year’s financial statements, but instead are used to reduce retained earnings in the year the dividend decision is made. In this article we want to talk about the changed rules of dividend payments.

When can owners make dividend decisions, and in what year are they recognised?

Resolving to pay dividends is still only possible when accepting financial statements. The most significant change is that reductions in equity caused by dividend payments are not recognised in the year of the financial statements approved along with the dividend decision, but only in the year the decision is made. Irrespective of the dividend decision, the profit after tax is first transferred into retained earnings when the accounts are opened for the following year, and only on the day the dividend decision is made does the company reduce its accumulated profit, the retained earnings. In practice, this means that dividend payments approved when accepting 2016 financial statements are only recognised as a reduction in retained earnings during the 2017 financial year.

What can a dividend be paid from?

The unallocated retained earnings supplemented with the previous year’s profit after tax can be paid out as a dividend. The previous regulation stated the 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. Attention should be paid to this change in the decision approving financial statements too.

To what extent are decisions approving financial statements to change?

Owing to the legislative amendments we recommend making the following changes to the wording of decisions approving financial statements:

• The phrase profit or loss for the year can no longer be used, instead, profit after tax should be adopted.

• It is no longer accurate to say that the owner decides on placing the profit after tax into retained earnings, because this is now prescribed by the Accounting Act, it is not up for decision.

• On account of the changed definitions in the Act on Accounting, companies chiefly pay dividends from retained earnings, and not from profit after tax.

What disclosure obligations are there for dividends?

Based on the Accounting Act, the supplementary notes still have to present the proposal on the use of the profit after tax. We believe this provision is 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. The legislator presumably 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. As dividend payments are not yet approved by the owners at this time, this should be highlighted for the readers of the financial statements. Consequently we recommend using careful wording in the supplementary notes when phrasing proposals for dividend payments.