1. Reserves, Provisions and Dividends
Chapter 5
Reserves, Provisions and Dividends

2. 5.1
Income Tax

3. PAYG Instalments
The PAYG Installment System applies to taxpayers with business and investment income.

4. PAYG Instalments
Most taxpayers with business or investment income will pay tax instalments quarterly.

5. 28 February (one month extension)
PAYG Instalments
Quarterly payments will be due 28 days after the end of each quarter:
28 October
28 February (one month extension)
28 April
28 July

6. AASB 112 ‘ Income Taxes’
Annual company income tax = taxable income * company tax rate.
Income tax expense is charged against profits for the year.
The balance payable in respect of the current period’s taxable income is a liability called Current Tax Payable.

7. Income Tax Under the PAYG Instalment system:
The first three quarterly income tax payments are based on sales or income whereas the final payment is an adjustment.

8. Income Tax

9. 5.2
Reserves

10. Reserves
Reserves are that part of Shareholder’s Equity that are not issued or paid-up capital or retained profits.
Chapter 5

11. Sources of Reserves
Transfer of profits into a reserve for a specific reason or future need.
Asset revaluation gains can be directly posted to the reserve.
Chapter 5

12. Common Types of Reserves
Dividend Equalisation Reserve
Asset Revaluation Reserve
Capital Profits Reserve
Currency Fluctuations Reserve
General Reserve

13. Categories of Reserves
1. Realised Gains
2. Unrealised Gains
3. Shareholder Contributions

14. 5.3
Provisions

15. AASB 137 Provisions, Contingent Liabilities and Contingent Assets
Represent a present obligation resulting from a past event
Require a probable outflow of resources to settle the obligation
Must be able to be reliably estimated.

16. AASB 137 Provisions, Contingent Liabilities and Contingent Assets
A probable obligation exists where it is considered more likely than not.
If it is a remote possibility only, then it does not need to be disclosed.

17. Types of Provisions Provision for Annual Leave
Provision for Sick Leave
Provision for Long Service Leave
Provision for Dividend
Provision for Warranty

18. Provisions vs Reserves
Provisions are liabilities. They are estimates of amounts to be paid in the future.
Reserves
Reserves are an increase in Shareholders Equity arising from profits to meet future needs.

19. Provisions vs Liabilities
Provisions are estimates of future obligations.
Liabilities
Liabilities that represent a present obligation of the company arising from past events.

20. 5.4
Accounting Entries

21. General Reserve Created to transfer amounts from retained profits.
No specific purpose for the funds.
Can be used to shore up the Balance Sheet of a company.

22. General Reserve Companies can use this reserve at their discretion.
There is no requirement to have a general reserve.

23. General Reserve – Accounting Entries

24. Dividend Equalisation Reserve
Established to set aside amounts for the payment of future dividends.
Can be used to pay usual dividends during a period of low profits.

25. Dividend Equalisation Reserve
It is not a requirement that a company establishes this reserve.
Can convince shareholders that the company is focused on providing dividends.

26. Dividend Equalisation Reserve – Accounting Entries

27. Asset Revaluation Reserve
Companies periodically assess and revalue assets such as Land and Buildings.
This is done to accurately reflect the true value of assets.

28. Asset Revaluation Reserve
Any gain from revaluing assets is not treated as profit.
The gain is transferred to the Asset Revaluation Reserve.

29. Asset Revaluation Reserve – Accounting Entries

30. Funding a Bonus Share Issue with an Asset Revaluation Reserve
The Asset Revaluation Reserve may only be used to fund bonus share issues.

31. Funding a Bonus Share Issue with an Asset Revaluation Reserve

32. Reasons for a Bonus Issue
Bonus Issues
Reasons for a Bonus Issue
A non-cash return to shareholders
To tell the market that the company expects good future profitability.
To use funds in the Asset Revaluation Reserve or other reserves which cannot be used elsewhere.
As a takeover defence.

33. Bonus Issues – Accounting Entries

34. Example: Bonus Share Issue

35. 5.5
Dividends

36. Dividends Interest is not payable on a dividend.
Dividends are a distribution to shareholders out of retained profits.
The company’s constitution will set out dividend policy or the Replaceable Rules may be adopted.
Interest is not payable on a dividend.

37. Interim and Final Dividends
The company constitution will usually allow the payment of an interim and final dividend.
An interim dividend is a dividend paid at some time throughout the accounting period.

38. Steps in Dividend Payment
The Declaration Date
The Closure of the Register and Date of Record
Ex-Dividend Date
Date of Payment

39. 1. The Declaration Date
The Board of Directors resolves to pay an interim dividend during the year on a declared date.

40. 2. The Closure of the Register and Date of Record
Notifications of share transfers before the date of record will mean that any new shareholder receives the dividend. However, notification on or after will mean that the previous shareholder receives the dividend.

41. 3. Ex-Dividend Date
The ex-dividend date is 4 days before the date of record.
A purchaser of shares before the ex-dividend date is entitled to the dividend.

42. 4. Date of Payment
Is the date on which the dividend cheques are mailed to shareholders or credited to shareholders.

43. Dividends – Accounting Entries

44. Example: Payment of Dividends

45. Example Continued

46. Self-Test Exercise

47. Self-Test Exercise