Technical Clarification: Accounting for Dividend and DDT as per IndAS 32
ICAI recently published Technical Clarification on certain aspects. In this post, we are discussing the issues related to accounting for “Dividend” and DDT on Preference Shares.
Treatment of Dividend on Preference shares classified as Financial Liability
The issue in question is as follows:
In the financial year, company-issued cumulative redeemable preference shares (Pref. Shares) carrying a dividend of 10% per annum. The preference shares are redeemable at a premium at the end of 8 years from the date of their issue. After considering the relevant provisions, the company has determined that the preference shares will be classified as a financial liability in their entirety under Ind AS 32, Financial Instruments: Presentation. The questions that arose are:
- How to classify the dividend payment against this liability under Ind AS 32? and
- How to classify the Dividend Distribution Tax (DDT) paid on the said dividend?
As per paragraphs 35 and 36 of Ind AS 32, Financial Instruments Presentation
- Interest, dividends, losses, and gains relating to a financial instrument or a component that is a financial liability shall be recognized as income or expense in profit or loss (Para 35)
- Distributions to holders of an equity instrument shall be recognized by the entity directly in equity (Para 35)
- The classification of a financial instrument as a financial liability or an equity instrument determines whether interest, dividends, losses, and gains relating to that instrument are recognized as income or expense in profit or loss (Para 36)
Accordingly, dividend payments on shares recognized as liabilities in entirety, are recognized as expenses in the same way as interest on a bond. (Para 36)
Further, paragraphs B5.4.4 and B5.4.8 of Ind AS 109, Financial Instruments, state that:
- When applying the effective interest method, any fees, points paid/received, transaction costs and other premiums or discounts that are included in the calculation of the effective interest rate are also amortized over the expected life of the financial instrument.
The Guidance Note on Division II – Ind AS Schedule III to the Companies Act, 2013 issued by ICAI provides the following guidance in respect of dividend on preference shares:
- The dividend on preferences shares, whether redeemable or convertible, is of the nature of ‘Interest expense’, only where there is no discretion of the issuer over the payment of such dividends. In such a case, the portion of the dividend as determined by applying the effective interest method should be presented as ‘Interest expense’ under ‘Finance cost’.
Accordingly, the corresponding Dividend Distribution Tax on such portion of non-discretionary dividends should also be presented in the Statement of Profit and Loss under ‘Interest expense’.
The Accounting Standards Board of the ICAI in FAQ on DDT states that
- DDT paid on the dividends should be presented in the same way as the presentation of the transaction that creates those income tax consequences. Hence, if the dividend itself is charged to profit or loss, DDT also should be charged to profit or loss.
- If the dividend is recognized in equity, The DDT on the same should also be recognized in equity.
In the above case, the preference shares are classified as a liability in their entirety. Therefore, the ‘dividend’ thereon is considered to be in the nature of interest. Accordingly, the related dividend distribution tax should be regarded as part of interest cost and should form part of EIR calculation.