What’s the Difference Between Interim Dividend and Final Dividend?
In this post, we have discussed the meaning of “interim dividend and final dividend” and also some legal provisions concerning their declaration and payment.
What is meant by Interim Dividend and Final Dividend?
Every profitable business pays a portion of its profits to its shareholders. The sum so distributed in this manner is known as a dividend. Interim dividends are those which are declared by a company’s directors over the course of an accounting year in anticipation of deriving profits of the same year. But in common practice, a dividend is mostly declared by a company in its Annual General Meeting after the closure of the accounting year. This dividend is called an annual dividend or final dividend. Unlike interim dividends that are normally paid out of retained earnings and in expectation of profits, a final dividend is declared only after determining the available profits of a given year.
In other words, an interim dividend is one that is declared by the Board of Directors in between two annual general meetings. It is declared at any time before the closure of the financial year.
On the other hand, a final dividend is declared for a financial year after the final accounts are ready and the amount of distributable profit is available. It is declared by a company in its annual general meeting on the recommendation of the Board.
Given below are certain important provisions concerning interim and final dividends.
Interim dividend where there is loss:
If the company has incurred a loss during the current fiscal year up to the end of the quarter immediately preceding the date of declaration of interim dividend, then such interim dividend shall not be declared at a rate greater than the company’s average dividends declared during the three fiscal years preceding the current fiscal year. [Section 123(3) of the Companies Act]
Amount of dividend to be deposited
The amount of the dividend, including the interim dividend, must be deposited in a scheduled bank in a separate account within five days of the dividend’s declaration. [Section 123(4) of the Companies Act]
Accounting treatment of dividends
Interim dividend if any, declared is shown as an appropriation of profits and is debited “below the line” in the Profit & Loss Account. Similarly, the final dividend proposed to be declared is also shown as an appropriation of profits and is debited to the Profit & Loss Account “below the line”.
The proposed dividend for the current fiscal year appears on the liabilities side of the Balance Sheet under the sub-heading “Provisions” below the heading “Current Liabilities and Provisions”. This is because the proposed dividend is only payable if it is approved at the annual general meeting, which will be convened after the final accounts have been compiled at the end of the fiscal year.
Further, where the amount of dividend remains unclaimed, the amount is shown under the heading “Current Liabilities” on the Balance Sheet.
Difference Between Interim Dividend and Final Dividend
The following points will set out the differences between interim dividend and final dividend:
|Basis||Interim Dividend||Final Dividend|
|Declaration||An interim dividend is declared by the Board of Directors of a company.||The final dividend is declared by a company in its annual general meeting.|
|Paid out of||It may be declared out of surplus in the Profit and Loss Account or out of profits of the year in which such dividend is declared.||It is declared at the close of the financial year once the amount of distributable profit is available. Thus, the final dividend is paid out of current earnings.|
|AGM||It is declared between two AGMs.||It is declared in the AGM.|
|Release of financial statements||The interim dividend is declared ahead of a company’s AGM and before the annual & audited financial statements are released.||The final dividend is declared once the final version of the financial statements is prepared and released.|
|Cancellation||It may be revoked subject to the approval of shareholders.||It can’t be revoked because once declared, it becomes a debt for the company.|
|Frequency||It may be declared more than one time in a year.||It is declared once a year.|
|Rate||Usually, the rate of interim dividend is less than the final dividend.||The rate of final dividend is usually higher.|
|Authorization by Articles||An interim dividend can only be declared if the Articles of Association expressly authorize the same.||No such authorization is needed for a final dividend to be declared.|
|Type of Resolution||A Board Resolution is passed for the declaration of interim dividends.||At the AGM of the company, an ordinary resolution is passed for declaring final dividends.|
Transfer of unpaid dividend [Section 124 of Companies Act]
The Companies Act specifies the treatment if the amount of dividend declared by a company remains unpaid.
If a dividend has been declared by a company but has not been paid/claimed within 30 days from the date of its declaration to any shareholder entitled to the payment, such unpaid or unclaimed amount of dividend must be transferred by the company to a special account (called the Unpaid Dividend Account) to be opened for this purpose in any scheduled bank.
This transfer has to be made within 7 days after the expiry of the said period of 30 days.
Also, within 90 days of making this transfer, the company has to publish on its website a statement containing the names, addresses, and the amounts of unpaid dividends to be paid to each person. The persons claiming the dividend will apply to the company.
Moreover, if the amount of dividend so transferred remains unpaid or unclaimed for seven consecutive years or more, then the amount in the Unpaid Dividend Account is to be credited to Investor Education and Protection Fund. Section 125 of the Companies Act 2013 specifies sources and purposes for which the fund monies can be utilized.
To sum up, if we see from an investor’s point of view, both interim and final dividends allow shareholders to benefit from the earnings growth of the company. The interim dividend is declared by directors in the middle of a year. Whereas the final dividend is voted on and approved at the AGM once the company’s earnings are known.
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