14 October 2022
Dear Sir, I would like to get your advice on the investment valuation and payment of dividend.
Company A invested Rs.1,00,000/- (including transaction cost of Rs.1000/-) in Company B in 2016. Company A showed the investment in BS as investment (capitalised the transaction cost also Rs.1000/-) total Rs. 1,00,000/-. Company B is not a listed company so the fair valuation of investment not done till today due to non availability of company B's valuation statement. Now 2022, Company B valued 10 times more. my question is 1. Company A is loss making company and no reserve in equity. Can the company pay dividend to the share holders. 2. how to account the investment valuation Gain in company A's books 3. From the investment gain Company A can pay dividend to its shareholders 4. if can pay dividend then how. Requesting your good advice and help to solve this problem
09 July 2024
Based on the scenario you've described, here are the answers to your questions:
1. **Payment of Dividend by Company A:** - Company A is a loss-making company with no reserves in equity. Generally, companies can only pay dividends out of profits available for distribution, which includes accumulated profits and reserves. Since Company A is loss-making and has no reserves, it may not be legally permissible for it to pay dividends. However, the final decision on dividend payment should be based on specific legal and regulatory provisions applicable to your jurisdiction and the company's specific circumstances.
2. **Accounting for Investment Valuation Gain in Company A's Books:** - Company A should account for the investment in Company B at its fair value as of the reporting date in accordance with the accounting standards applicable in your jurisdiction (likely Indian Accounting Standards, if applicable). Since Company B is not listed, determining the fair value might require an independent valuation by a qualified valuer based on relevant methodologies. - The accounting treatment typically involves recognizing the increase in the fair value of the investment as a gain in the income statement of Company A. This gain would be reflected in the statement of profit and loss under "Other Comprehensive Income" or "Profit on Revaluation of Investments," depending on the accounting policy adopted by Company A.
3. **Using Investment Gain to Pay Dividend:** - If Company A is legally allowed to pay dividends despite being loss-making (which is uncommon but could vary based on local regulations), theoretically, it could use the investment gain to fund dividend payments. However, this should be approached cautiously because dividends are generally paid out of distributable profits or reserves.
4. **Process for Paying Dividend:** - If Company A determines it can pay dividends based on local laws and regulations, the process typically involves: - Holding a board meeting to approve the dividend payment. - Ensuring the availability of distributable profits or reserves for the dividend payment. - Issuing a notice to shareholders about the proposed dividend. - Following the procedures outlined in the Companies Act or other applicable regulations for declaring and distributing dividends. - Ensuring compliance with tax withholding obligations, if any.
**Important Considerations:** - Consult with a qualified accountant or financial advisor to ensure compliance with accounting standards and legal requirements specific to your jurisdiction. - Understand the implications of paying dividends from investment gains versus accumulated profits or reserves. - Consider seeking legal advice to determine the legality of paying dividends given Company A's financial position and regulatory environment.
This approach should help clarify how to account for the investment valuation gain and the considerations around dividend payment by Company A.
CAclubindia
