A company's reporting date is 31 December. In February, after the reporting date but before the financial statements are authorised for issue, the directors declare a final ordinary dividend for the year just ended. How should this dividend be treated in the financial statements for the year ended 31 December?

Correct answer: B) It is not recognised as a liability at the reporting date, but is disclosed in the notes

Explanation

At 31 December the company had no present obligation to pay the dividend, because it had not yet been declared, so it does not meet the Conceptual Framework definition of a liability and is not recognised. It will be deducted from retained earnings in the statement of changes in equity of the following year, when it is declared. IAS 1 requires the amount of dividends proposed or declared before the financial statements are authorised for issue, but not recognised, to be disclosed in the notes. Dividends are never an expense in profit or loss.