The waiver of dividend payments affects profit reserves
Many companies have had to face the fact that, financially, 2020 did not turn out as previously forecast. While revenues have fallen significantly, costs have not decreased at a similar rate. While the performance of a previously profitable company may turn into a loss, it can also jeopardise the company's creditworthiness. The latter is typically subject to the requirement of a profit after taxation. The owners of the company may have decided to waive all or part of their dividend claims in order to avoid this unfavourable situation.
However, according to the latest amendment to the Accounting Act (27 Nov 2020),the amount of the dividend waived, from the amendment date, is no longer to be included in other income, but must be entered directly in the profit reserve simultaneously with the adoption of the decision. This does not change the company's profit before tax and profit after tax. In the case of a company that is making a loss, it is also important to keep an eye on the equity, as the legislation clearly penalises a capital shortfall and obliges the company to take action. At the same time, the amount of equity can be kept within the desirable range by foregoing dividends and increasing the profit reserve. In addition, the waived dividends are also exempted from duty under the Duties Act.
Influence of tied-up reserves on the source of dividends
In response to the COVID-19 epidemic situation, more favourable conditions for the establishment of a development reserve have been set out in the new government decree that entered into force in summer 2020. With the amendment of the previous regulation, the amount of the development reserve can now reach the total amount of the profit before tax (profit). However, the maximum amount per tax year has not been changed, and the maximum amount that can be set aside as a development reserve remains HUF 10 billion.
It should be noted, however, that the development reserve that can be established for up to 100% of the profit before tax must be transferred from the profit reserve to the tied-up reserves, therefore its amount affects the possibility of paying dividends.
When can dividends be paid?
The rules for the approval and accounting of dividends have changed significantly from previous practice due to the accounting changes of 2016.
The aim of the change was to bring Hungarian accounting law in line with international accounting standards, to make the administration of the approval of reports easier (no need to prepare separate balance sheets before and after dividends).
Under the current rules, the free profit reserve plus the profit after tax of the previous financial year may be paid out as a dividend if the amount of equity less the tied-up reserves and the positive valuation reserve does not fall below the amount of subscribed capital after taking the dividend into account.
In determining the amount of the free profit reserve and the amount of equity, the amount of dividends received (receivable) and dividends or shares not yet included in the report for the previous financial year but recognised in the year under review up to the date of the balance sheet may be taken into account as an increment. It should be noted, however, that negative profit reserves reduce the possibility of paying dividends, and the rules on the dividend limit were also tightened, so capital reserves may not be used as a hedge against negative profit reserves when calculating the hedge.
Accounting for payable dividends in the reports
The amount of the dividend approved and payable must be entered in the accounting records simultaneously with the adoption of the decision, in the financial year following the year in question.
The dividends payable to shareholders are accounted for on the basis of and on the date of the shareholders' decision approving the report, as an item reducing the profit reserve and increasing liability. In practice, this means that a decision on the use of the profit after tax for a given financial year, in this case 2020, as dividends, must be adopted in the period following the financial year in question, i.e. in 2021, when the annual report is approved. However, the approved dividend will thus have to be recognised in the accounting records in the financial year following the period under review, i.e. in 2021. The Civil Code states that the proposal for the appropriation of the profit after tax is identical in substance to the proposal for the approval of the dividend.
Of course, the provision for the approved dividend and its financial settlement may also differ in time under the provisions currently in force.