Final Dividend

Definition

A final dividend refers to the payment declared by a company’s board of directors to be distributed to shareholders after the end of a financial year, contingent upon approval at the annual general meeting (AGM). It represents a share of profits that is distributed to shareholders as an award for their investment in the company. Unlike interim dividends, which can be declared at any time, the final dividend is typically declared at the end of the financial year and is shown as an appropriation of profits in the profit and loss account. Until it is disbursed, it is recorded as a current liability on the balance sheet.

Examples

Company XYZ: At the end of its financial year, Company XYZ’s board of directors recommends a final dividend of $1.50 per share to be distributed to shareholders. This recommendation is included in the agenda for the upcoming AGM, where shareholders will vote on the proposition. If it is approved, Company XYZ will record the final dividend as a current liability and arrange for payment on the specified date.
Company ABC: After a profitable year, Company ABC’s directors propose a final dividend of $0.75 per share during their AGM. Following shareholder approval, the company schedules the dividend payment and recognizes the outstanding amount as a liability until the distribution process is completed.

Frequently Asked Questions (FAQ)

Q1: What distinguishes a final dividend from an interim dividend?

A1: A final dividend is proposed at the year’s end and subject to shareholder approval at the company’s AGM, while an interim dividend can be declared and paid at any time during the year without a prior shareholder vote, provided the company’s articles of association allow it.

Q2: How is a final dividend recorded in financial statements?

A2: Until paid, the final dividend is recorded as a current liability on the balance sheet. It is also shown as an appropriation of profit in the profit and loss account.

Q3: Is shareholder approval mandatory for a final dividend payment?

A3: Yes, shareholder approval is required at the AGM for a final dividend to be distributed.

Q4: When is a final dividend typically paid?

A4: The timeline for payment is usually set shortly after the AGM, once the shareholders have approved it.

Q5: Can a company change its final dividend declaration?

A5: The declaration can be modified before the AGM but any changes must be approved by shareholders during the meeting.

Annual General Meeting (AGM): A yearly gathering of a company’s interested shareholders. At this meeting, the directors present an annual report containing information for shareholders about the company’s performance and strategy.

Interim Dividend: A payment made to shareholders that is decided by the directors before a company’s annual general meeting and before the end of its financial year.

Appropriation: The action of setting aside profits for a specific purpose, such as the payment of dividends.

Profit and Loss Account: A financial statement that summarizes the revenues, costs, and expenses incurred during a specific period, showing the company’s profitability.

Balance Sheet: A financial statement that summarizes a company’s assets, liabilities, and shareholders’ equity at a specific point in time.

Online References

Suggested Books for Further Studies

“Financial Accounting: An International Introduction” by David Alexander and Christopher Nobes
“Accounting and Finance for Non-Specialists” by Peter Atrill and Eddie McLaney
“Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
“Financial Reporting and Analysis” by Charles H. Gibson

Accounting Basics: “Final Dividend” Fundamentals Quiz

### What is a final dividend? - [ ] A dividend paid monthly. - [x] A dividend recommended by the directors of a company to be paid to shareholders, subject to approval at the annual general meeting. - [ ] A dividend declared four times a year. - [ ] A dividend paid only to preferred shareholders. > **Explanation:** A final dividend is proposed at the end of a financial year by the directors and must be approved by shareholders at the AGM. ### How is a final dividend recorded in a company's financial statements until it is paid? - [x] As a current liability. - [ ] As an asset. - [ ] As revenue. - [ ] As equity. > **Explanation:** Until paid, the final dividend is shown as a current liability in the balance sheet. ### Which of the following must happen before a final dividend can be paid to shareholders? - [ ] The company must be rated by a financial agency. - [x] Shareholders must approve it at the annual general meeting. - [ ] Employees must agree to it. - [ ] The government must authorize it. > **Explanation:** Shareholders must approve the final dividend at the annual general meeting before it can be paid. ### When is a final dividend typically declared? - [ ] At any time during the financial year. - [ ] At the beginning of a financial year. - [x] At the end of a financial year. - [ ] Quarterly. > **Explanation:** A final dividend is typically declared at the end of a financial year. ### What is the distinguishing feature of a final dividend compared to other dividends? - [x] It is subject to shareholder approval at the annual general meeting. - [ ] It is only paid to new shareholders. - [ ] It does not require top management's recommendation. - [ ] It is usually less than interim dividends. > **Explanation:** The final dividend is subject to approval by shareholders at the annual general meeting. ### Who typically recommends the payment of a final dividend? - [ ] Shareholders. - [x] The directors of the company. - [ ] The employees. - [ ] External auditors. > **Explanation:** The recommendation for a final dividend typically comes from the company's directors. ### Can a final dividend declaration be modified? - [x] Yes, but it requires approval from shareholders at the AGM. - [ ] No, once declared, it cannot be changed. - [ ] Only if employees vote to do so. - [ ] No, it is set in stone by the directors. > **Explanation:** The final dividend declaration can be modified but requires shareholder approval at the AGM. ### How does a final dividend benefit shareholders? - [x] It disburses a portion of the company's profits to them. - [ ] It reduces their stock ownership. - [ ] It requires them to invest more. - [ ] It diminishes the company's market value. > **Explanation:** A final dividend benefits shareholders by providing them with a portion of the company's profits. ### Why does a final dividend become a current liability until paid? - [ ] Because it is money the company owes to shareholders. - [x] Because it is an amount that has been declared but not yet disbursed. - [ ] Because it is related to interest payments. - [ ] Because it leads to tax savings. > **Explanation:** A final dividend is considered a current liability as it represents an obligation that has been declared but not yet paid. ### What document typically contains the proposal for a final dividend? - [ ] The quarterly financial report. - [ ] The company's promotional flyer. - [x] The annual general meeting’s agenda. - [ ] The board's meeting minutes. > **Explanation:** The proposal for a final dividend is typically included in the agenda for the annual general meeting.

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