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Lvl 3 - Dividends

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Probably a very simple and obvious answer, but I'm confused.

A question/assignment I'm trying to answer states (as part of the question) that 'Dividends of 5% have been proposed'.  My confusion is, 5% of what?

Can anyone enlighten me please, as my 2 versions of the answer I've provided so far are incorrect.

Thanks

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  • # 72392

> Taking a punt from memory as I have not looked this one up but I believe the answer would be 5% of the retained profit as dividends as a distribution of retained profit.

Cheers
Stuart
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  • # 72396

I would have thought that it would be 5% of the issued share capital.

If the nominal value of the share capital was £1,000, the dividend would be 5% thereof. THis would be £50.

I hope that this helps.

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Hi Adrian 

I would agree with Stuart ,as dividends are usually proposed on retained profits. 

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  • # 72402

Whilst I do not want to argue with two fellows, dividends are paid out of retained profits but are declared on the issued share capital.

However it may well be that question meant that dividends would be paid equating to 5% of the retained profits. But is it 5% of the total retained profits or 5% of the retained profits for the year.

It seems to me that it was a badly worded question.



Edited at 22 Jun 2011 08:04 AM GMT

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> Hi Adrian

I think you be getting a little confused.

The proposed dividend is 5% of the retained profit the split of the 5% is then based on the proportion of the individual shareholding.

Kind regards
Stuart
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  • # 72411

Stuart

I am not confused at all.

We are both correct in what we say.

The problem is the exact wording in the assignment.

I can give an example where paying 5% dividend on a years reatained profit would be illegal.

We need the full question to be able to answer the original query.

The three possibilies are:-
1) 5% of the yearly reatined profit.
2) 5% of the total retained profit.
3) 5% on the issued share capital.

There are all correct and need to be considered.

Adrian



Edited at 22 Jun 2011 10:16 AM GMT

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Adrian said:

Stuart

I am not confused at all.

We are both correct in what we say.

The problem is the exact wording in the assignment.

I can give an example where paying 5% dividend on a years reatained profit would be illegal.

We need the full question to be able to answer the original query.

The three possibilies are:-
1) 5% of the yearly reatined profit.
2) 5% of the total retained profit.
3) 5% on the issued share capital.

There are all correct and need to be considered.

Adrian



Edited at 22 Jun 2011 10:16 AM GMT


Thank you to everyone for your responses, it is 'heartening' to see that it clearly is not an obvious answer that everyone else understands immediately :)

The full question is lengthy and I do not have access to it from work, but basically I had to produce P&L and Balance sheet for a Ltd company.  Proposed dividends had to be shown in the P&L and the only reference to the amount due was the line I quoted in my original question, "Dividends of 5% have been proposed".

The correct answer for the question turned out to be 5% of the Share Capital, I'd incorrectly 'guessed' at both Adrians 1st and 2nd options.  I could understand if these were Preference Shares, but to my knowledge they were just ordinary shares.  Can you shed some llight for me please as to why it is 5% of Share Capital.

Thanks
 

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Hi 

If that was the case then I think this is a  unreasonable question in the exam paper.  The most share capital I have ever seen on most small to medium sized business in £6,000 is usually about £500 to £1500.   The £6,000 would be high.  

I have never seen a company ever, in real life propose 5% dividends on share Capital .  If this was the answer I would like the ICB to explain.  

I can completely understand Stuarts post.   I can promise this in 15 years of been in business I have never seen a % of Dividends paid on Share Capital

I think this needs to reviewed by the ICB  as this very confusing to Students.  

Edited at 22 Jun 2011 07:51 PM GMT

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Hi,
I don't think that 5% is a particularly unrealistic return given todays climate, you would certainly struggle to find it from a high street bank. It is perhaps a little low but nothing outrageous. To express dividend pay out in any other way than relating it to share capital would be meaningless and make it impossible for investors to compare alternative investments. This is why it should be expressed as a percentage of share capital rather than a distribution of 5% or 90% of retained profit.
Just thinking out loud. 

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Hi 

I am sorry I  have to disagree with the above.  This is totally unrealistic.  

80% of the companies in this country are small to medium sized companies and are not interested in Investors comparing Dividends.   If anyone is interested , if you go on to Companies house and you will see 90.99 % of Dividends on are paid on retained profits in proportion to how much share capital each director has.  (This is a very worthwhile exercise for training) 

With regards to comparing the 2006 companies act covers this completely as the Dividends must by law be shown after retained profits brought forward year on year.  Any investor can see exactly what the retained profits are like on like in various business and they can also see much more clearly exactly the amount of Dividends paid to share holders under Reserve Movements covered under Companies Act 2006  far more clearly then the previous companies act 1985 

In reality and not in text book Companies propose Dividends at various points of the year providing the company is in profit .  The Directors then pay  10% tax .    

You would not pay 5% of shared Capital of example £500 to £1,500 which most companies are with two directors in the UK.  In some cases the called up share Capital is a couple of quid to show equal share or the ratio of the directors ownership.

I am not been funny but that would  £25 each.    You would not pay the accountancy fees that are required to proposed such a silly amount  .   How more unrealistic could this  be . 

If you are interested in this subject and what actually happens , you can go on to Companies House and view any set of accounts for a small fee. If you find a set of accounts that has paid 5% dividends on Share Capital and not on retained profit  it would be a extremely small percentage.

 It has nothing to do with current climate most accounts show a small share capital as Stuart says to show the ratio of directors ownership in their company.

For me I would like to see the ICB cover this subject better and  that is reflects real life companies Financial Statements .  

It would be really good if the ICB could get the ICAEW view on this or the other Accountancy bodies for a discussion .   I still think this is confusing for Students 




Edited at 23 Jun 2011 01:06 AM GMT

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Thank you evryone, I have found this debate very insightful and interesting.  I am about to take my level 3 manual and do not work in the inducstry yet so all hints, tips and debate are very useful.

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  • # 72444

Adrian said:

“I would have thought that it would be 5% of the issued share capital.

If the nominal value of the share capital was £1,000, the dividend would be 5% thereof. THis would be £50.

I hope that this helps.”

Adrian

Coiuld you please clarify your point above and also your later posting regarding illegal declarations.

I am now very confused. Using your analogy above why would you declare a dividend on share capital? On that basis the firm could make a loss and yet still declare a dividend - to be paid out of what?

If you take the major plc's as an example they don't declare dividends on a shareholding but on a profit (retained earnings)  and if there is no profit then they dont pay a dividend.

Or, as I said on another posting, "am I missing something?"

[edited to correct typo's]

Edited at 23 Jun 2011 08:12 AM GMT

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Geoff

Firstly your comments with regard to large companies, the dividend is declared as a number of pence per share and therefore is based upon the share holdings.

With regard to illegal dividends, if you think that the profit and loss account at say 31/12/10 is £30,000 overdrawn with share capital of £100,000. Therefore the company is not insolvent.

In the year to 31/12/11 it makes a profit before dividends of say £20,000. It therfore cannot make a dividend payment but the way that the forum was going you could have made one.

I hope this clarifies the situation.

Adrian

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Adrian

I am not an expert so cannot comment on the second point, maybe others will have an opinion.

However on the first point I am aware of the basis of share dividend distribution. If a dividend is say 10p and I have one share and you have ten then I get 10p and you get £1.,

The distribution is pro rata to the shareholding.

If the retained earnigs are say £10,000 and the proopsed dividend is 5% then the figure will be £500. If there are 500 shares issued each will get a dividend of £1, a shareholder will get £1 x the number of shares that he/she holds.

So, in my opinion, your original answer as stated " I would have thought that it would be 5% of the issued share capital." is incorrect and the answers from Stuart and Sarah will be correct.

I cannot think for one moment that the ICB question would be so badly worded as to imply anything else. Of course we have not seen the paper.

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  • # 72449

Geoff

Can i please refer you to the answer by Sanfio at 11.50am yesterday.

Adrian

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HMRC website 
Determination of profits

  1. The Act lays down what can be termed the “balance sheet surplus method” of determining profits available for distribution. Under this, a company can distribute the net profit on both capital and revenue at the particular time, as shown by the relevant accounts.
  2. Section 263 (3) Companies Act lays down the basic rule, but it does not apply to investment companies and is qualified in respect of public companies by Section 264. It states that a company's profits available for distribution are its accumulated, realised profits (on both revenue and capital) not previously distributed or capitalised, less its accumulated realised losses (on both revenue and capital) not written off in a proper reduction or reorganisation of capital.
  3. The inclusion of “accumulated” is important, making it clear that the current year's position cannot be taken in isolation. Realised profits include both trading profits and profits on the realisation of capital assets, but not unrealised profit arising as a result of a revaluation of assets. An unrealised profit cannot be used to pay up a debenture or amounts unpaid on its issued shares. However, an unrealised profit arising on the revaluation of a fixed asset may be used to calculate a sum which is then treated as a realised profit provided a sum for depreciation of the asset over a period is written off or retained. The amount that can then be treated as a realised profit is the amount by which the sum written off or retained exceeds the sum that would have been written off or retained for depreciation of the asset over that period if the profit had not been made (Section 275 (2)).
  4. Under Section 275 (1) Companies Act, realised losses for the purpose of Section 263 include amounts written off or retained for depreciation.

Hi Adrian

"Geoff

Firstly your comments with regard to large companies, the dividend is declared as a number of pence per share and therefore is based upon the share holdings.

With regard to illegal dividends, if you think that the profit and loss account at say 31/12/10 is £30,000 overdrawn with share capital of £100,000. Therefore the company is not insolvent.

In the year to 31/12/11 it makes a profit before dividends of say £20,000. It therfore cannot make a dividend payment but the way that the forum was going you could have made one."

Adrain,  This is not what Geoff said , or any of the other fellows who commented on the forum.   Your implication is that we do not know the rules of paying dividends.   I apologise if I have misunderstood your post .  As I have said before I would like to the ICB cover this better.  

I have attached the determination of profits from the HM website for this discussion 



Edited at 23 Jun 2011 10:05 AM GMT

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Adrian said:

“Geoff

Can i please refer you to the answer by Sanfio at 11.50am yesterday.

Adrian”

You can, and I have looked. As I said in my answer it was my opinion based on the very limited question - and based on that limited infornmation I would give the same answer.

The reply from Sanfio suggests otherwise but he/she  still does not know why it is different, nor do any of us because we have not seen the question in full. It is, I think, important for us all to understand the reasoning behind an answer - I certainly don't tell my clients that something has to be done "because it does."

It would help Sanfio (and the rest of us) if he/she obtained the reasoning behind the answer and enlightened us all. It may of course not even be an ICB assignment.

Sarah - thank you. As you will have seen I had set out my understanding of the share dividend process in a subsequent posting and also acknowledged that I am not an expert on the wider implications, hence I would never give advice to a client without seeking guidance from my peers.

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  • # 72453

I do honestly feel that everyone here is missing the point.

At no stage did i say that fellows do not know the rules for paying dividends. The determination of profits was never an issue.

At far as I am concerned this matter is now closed and i will not be making any further comments.

Edited at 23 Jun 2011 10:27 AM GMT



Edited at 23 Jun 2011 10:30 AM GMT

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Hi Adrain 

I am sorry if I misunderstood your post.  I did mention this in my previous post.   I was referring to the comment below . 

"In the year to 31/12/11 it makes a profit before dividends of say £20,000. It therfore cannot make a dividend payment but the way that the forum was going you could have made one. "  This comment does refer to the determination of profits.  I also thought it would be useful information for any students reading the post.

In my view your points have added to the discussion and it highlights that I think the ICB should cover this topic better and bring in more real life scenarios .  I felt I needed to answer the above comment because I had made quite a few.  It was unclear who you were referring to when you mention the way that the forum was going you could have made one.   

I think you have raised some very questions as to ICB papers 



Edited at 23 Jun 2011 11:02 AM GMT

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Sarah

Thank you very much for your comments.

They are appreciated.

Adrain

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As I'm desperately been trying to book my manual exam for months (childcare issues) I do practice questions now and again and ALL of them have been on the % of the share capital and not the retained profit. 
I didn't want to enter this debate but feel there's been one or two lately that should be in a  member's only area.

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MrsS said:

As I'm desperately been trying to book my manual exam for months (childcare issues) I do practice questions now and again and ALL of them have been on the % of the share capital and not the retained profit. 
I didn't want to enter this debate but feel there's been one or two lately that should be in a  member's only area.


Mrs S - a very good point you make in that the practice questions you have seen  state the basis of the distribution. The problem with the original question was that we had no other information.

There has been criticism of the ICB in the suggestion that the question was badly worded but as I pointed out none of us had sight of this, and it might just have been from some where else. Or it might have just had that extra bit of information as with the papers you have seen.



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Hi 

Whilst I appreciate there will be members that feel certain topics should be in the members area only.  None of of the recent topics on the ICB would have been discussed if this was the case.

I do worry why ,  if we have a different view point to each other it should go to the members form.  I think this would stiful any good disscusions.  All the view points here have been discussed and thought out well.
Every one has explained well what their reasons are for and why.   It opens open a discussion and highlights a area that may  need to be looked  at.   

This shows the ICB to professional and full of members who question why they are doing things,  which is exactly what members should be doing.  

When I see a question I love the way it makes me think about my own knowledge.  There have been a few discussions on the forum with valid questions that have forced me to brush up.   This is a good thing.  

He or she who claims they know every rule , can be dangerous. No one knows every rule , that is why is is good to ask 




Edited at 23 Jun 2011 11:39 AM GMT

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Hi, Just seen your replies. I don't think that it has any thing to do with Companies House,Companies Act 2006, Text Books, Accounting Fees or for that matter the level of percentage as long as there is one. If there wasn't how would each shareholder know what they were entitled to? That's why dividends are a percentage of share capital or as Geoff put it "The distribution is pro rata to the shareholding". Which is exactly the same as saying dividends are paid as a percentage of share capital I only meant that you could do worse than earn a 5% return and on that basis it is realistic.

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Hi

You brought up in your post about investors comparing like for like companies.   Dividends and were the payment is allocated for people reading accounts and understanding has everything to do with both companies acts 2006 and 1985.

 It also has every thing to do with the points i mentioned .  I could not disagree more with the above statement .  I appreciate that is my personnel view.  I find it extremely hard to believe you think this  subject has nothing to do with companies house.  If all these companies where wrong paying dividends on profits both the HM and companies house would reject the accounts.


80% of the business in the uk are small to medium size firms .  You show the Capital as the ratio of who as the majority is in the company .  Which is done by a nominal amount.  ie £1 ,2 pounds.   Which is 5% of nothing really.  

Most directors would not get out of bed for 5% of a couple of quid. I am not sure if share capital is been mixed up here with Company reserves.

The shareholders know how much they are entitled to by how many shares they have.  

i think this debate can only really continued if the members are willing to pay for and look at a serious sample of Financial statements for the companies house.   I have.   In reality most business pay dividends on the % of Retained profits providing it also qualifies under the Determination of Profit Rules   

Edited at 24 Jun 2011 01:14 PM GMT

Edited at 24 Jun 2011 01:15 PM GMT

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Hi Sarah, I don't think that we are in disagreement too much since you have acknowledged "shareholders know how much they are entitled to by how many shares they have". That points a propsed dividend to share capital (doesn't it?) rather than at retained profit. When a distribution of dividend has been proposed, haven't all questions regarding the amount, frequency, legality, etc been done and dusted with? The dividend has been set and proposed, now all that needs to be done is pay the shareholders their correct entitlement. A percentage of proposed dividend is established (at whatever level and whether or not actually calculated) to make this equitable among the various share holders as you described above. Isn't that why we are interested in the proposed dividend as a percentage of share capital?

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Hi 

This is do with  the  exam question or not as Goeff as said .  It would be great if as Geoff asked we could see the full question and ICB accepted answer for the exam.

We are not saying the same thing.

The student has posted the answer was 5 % of the shared capital.  For example the shared capital of most companies small to medium is £1 a director so the total of shared Capital is £2  .  5% of £2 is 10p .  

As stuart explained the Dividends would be the % of The Retained Profits say £50,000  5% £2500 it is then the portion of ratio shareholders gets paid out in my example Each Shareholder would get dividends of £1,250 which is 50% each of the 5% of the retained profits not 5% of share capital which is £2 which is 10p .   Nobody would bother bother for 10p  .  80% of companies are medium and under where the shares are represented by a pound per share to show the ratio.

Can the ICB please look into this issue and we are going around in circles.  It is clear there is not an agreement on this topic .  The ICB should be testing on real life scenarios .  This thread is not going to help Students with Fellows disagreeing with members about the answer . 

Edited at 24 Jun 2011 09:39 PM GMT

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Hi, The details given in the original question are perfectly adequate and require no further information. The answer is share capital.

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Hi Roysa 

I ask that you take a sample of accounts from companies house.  As I mention this is going around in circles .  For students reading this .  My view point is different to Roysa.  Can the ICB please provide the answer , with a good reason. 

Your last response suggests that you do not want the ICB to discuss this issue.  I worry at the last response.  It suggests your answer is final which I disagree with . My main worry is your last post tries to suggest your answer is final one.  Both our views could be wrong for all we know and both views could be right.    This is not good for students which is why I have asked on every post for the ICB to comment.

I have no problem if I am wrong .  But I think it is good to have a view point .  Once again I ask if the ICB could comment as it is not good for the students .
 
I ask Roysa they we both respect that we have different views on this subject.   

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  • # 72558

Hi Everyone,

 

 I have read this thread and have waited unsuccessfully for a post closing this debate!

I am currently brushing up level 3 and had to go back to texts book to hopefully ensure not being shot at!  As far as the text book both Kaplan and others are concerned, dividend both ordinary and preference are paid and proposed on the share capital. Yes it is distributed on the retained profit after deduction of corporate tax and deduction of balance brought forward from previous year. The dividend can be distributed considering the company has got sufficient cash and has made sufficient distributable profit.

To Sanji73, hope this answers your question. If it does not i suggest you get yourself some documentations. I highly recommend ICB/Kaplan text book and the advanced kit. I personally read these and this has put my mind at ease after pulling my hair reading through another confusing debate! All the best for the exams.

Regards everyone,

xxx

 

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The problem with this thread is people are getting the real world and the exam world mixed up. 

My simplistic take on all of this EXAM situation - the dividends are calculated on the profits available for distribution and they are expressed as a percentage of the share capital.

 

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  • # 72564

Hi Peasie,

I agree  with you.

  • Calculated, that is what i meant  using the verb distribute, meaning can x% of distributable profit.
  • Expressed, that is what i meant while using  verbs pay and propose, meaning x% of share capital.
Good week end Peasie,Smile

xxx

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