Introduction to Final Dividend
Final dividend is the proportion of profit earned which is distributed among the shareholders of the company and generally announced during annual general meeting of the company for a specific given fiscal year i.e. this type of dividend is only announced after all the period ending financial statements are finalized, audited and released and the directors are made aware of the same.
Explanation of Final Dividend
Final dividend as discussed above is different from interim dividend is the manner that this is announced only after the books of accounts are finalized, audited and released. The directors are aware of the same and based on the profitability of the company the management will decide what percentage of profit to be distributed among its shareholders which is known as the final dividend. The financial health and profitability of the company are the key factors which decides the number as the final divided which is generally distributed on a per share basis. In regions like United Kingdom this term is a widely used concept among corporates and involves a large form of payment which is given to the shareholders of a company. It is generally in the annual general meeting of a company where such announcements are made by directors or management of the company about the final dividend for the specific fiscal year based on what the profit has been earned by the company. Generally, It is a larger payout made as compared to the interim dividend. A final dividend should never be mixed with the concept of liquidating dividend which is again the last and the final dividend paid by the company when the business is shutting down the operations or is getting acquired by some other company. Thus, final dividend and liquidating dividend are two different things.
Features of Final Dividend
The features are as follows:
- It is announced only after books are finalized and audited.
- It depends a lot on the final profitability and financial health of the business.
- It is generally larger than the interim dividends announced.
- In regions like UK it involves a larger payout and is given a lot of weightage,
- It is related to full year and is announced at the annual general meeting.
- A final dividend once declared cannot be cancelled unlike interim dividend.
Example of Final Dividend
Let us take an example of a company called ABC Ltd. for which a shareholder is holding 1000 shares and in the same year the company has announced dividend payout of $2 per share due to the profitability it has made in the year. Thus, the shareholder who was holding 1000 shares will get a payout of 1000* $2 = $2000 as a one-time dividend amount for the year. The final dividend once announced cannot be cancelled by the company under any circumstances otherwise it is liable to compensate the shareholders with interest charges. Once the company announces the final dividend it must release the payment within 30 days of announcing the news.
Final Dividend Accounting Treatment
Dividend be it any interim or final dividend if received will be shown on the income side of the Profit and Loss statement. Dividend be it interim or final if paid is generally deducted from the reserves and surplus of the balance sheet. The date when the board of directors declares the dividend, the shareholder’s equity account where we have the retained earnings is debited for the overall dividend amount which has been declared and the management is going to pay and in the current liability account, the section which has the dividend payable is credited with the similar value of amount as above. The second leg of accounting takes place when the amount declared actually get paid to the shareholders. On this date the current liability account where we had earlier the dividend payable section, will get debited now and in the asset account cash section will get credited.
Difference Between Interim Dividend and Final Dividend
The difference are as follows:
- Once the interim dividend is declared it can be canceled by the directors if required whereas the final dividend announced by the shareholders cannot be cancelled or else this act can get cost the company in form of added on interest.
- The board of directors announce the interim dividend whereas shareholders in the annual general meeting declare the final dividend.
- The interim dividend is announced before books of accounts are finalized or audited whereas final dividend is announced only after books of accounts are finalized, audited, and released.
- The interim dividend is generally meant for the half year i.e. six months whereas the final dividend is related to a complete fiscal year.
- The interim dividend announced does not tentatively turn to be an obligation due from the firm to its shareholders whereas the final dividend announced immediately becomes an obligation due from the firm to its shareholders.
Advantages and Disadvantages
Below are the advantages and disadvantages:
Advantages
Some of the advantages are:
- It is declared only after the company is sure about the profitability and financial of the business and books are finalized or audited.
- It is greater than interim dividends which is profitable to shareholders of the company.
- A company issuing the dividend gets a lot of confidence from the shareholder side as they perceive the company as a value generating firm.
- It shows the stability part of the company thus investors will be readily interested to invest in such firms.
- The temporary excess cash earned by the firm is utilized for the shareholders as the distribution of the profit earned.
Disadvantages
Some of the disadvantages are:
- Once announced under no circumstances it can be cancelled which is possible in the case of interim dividend.
- It is a lager payout for the company when compared to the interim dividend which means sharing of the profit to a larger scale.
- This reduces the retained earning to a larger scale as compared to the interim dividend.
- It limits the company growth as it reduces the sum or the value of usable cash.
Conclusion
As discussed above we found how the final dividend is different from the interim dividend. Also, we could see the pros and cons of issuing final dividend and how it benefits the company and the shareholders. To sum up final dividends are always a good approach by the company for the shareholders which acts as a motivating factor for them to have invested their hard earned money.
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