Question
An entity acquires 1,000 quoted equity shares in another entity for $20,000.  The shares are classified as ‘available-for-sale’.  Immediately prior to the entity’s year end of 31 December 2008, the security goes ex-dividend following declaration of a dividend of $1.50 per share.  At 31 December 2008, the quoted ex-dividend price of the shares amounts to 21c per share.  The entity receives payment of the dividend on 6 January 2009.  How does the entity account for the dividend?

Answer

Dividends on an available-for-sale equity instrument are recognised in profit or loss when the entity’s right to receive payment is established.  The right to receive payment is established when the equity instrument’s issuer declares a dividend or in the case of quoted equity securities, at the ex-dividend date.  When a share goes ex-dividend shortly before the dividend payment is actually due, the price will drop (all things being equal) by the amount of the dividend.  Therefore, depending upon the ex-dividend date (when the dividend income is recognised) and the payment date (when the receivable is settled), the realisation of part of the fair value through dividend payment will affect both profit or loss and equity. 

At 31 December 2008, the entity will recognise the dividend income in profit or loss and the change in the fair value of the shares in ‘other comprehensive income’ as noted below:

DR dividend receivable $1,500
CR profit or loss (dividend income) $1,500

DR Available for sale asset $1,000
CR other comprehensive income (1000 @ (21-20)) $1,000

The shares’ quoted price prior to the dividend adjustment would have been $22.50 giving a total fair value change of $2,500.  However, as part of this change (£1,500) is realised as a result of the dividend income recognised in profit or loss; there is an equal and offsetting change in other comprehensive income.