DIVIDEND RULES AND ACCOUNTONG ISSUES 1ELATING TO THE PAYMENT OF DIVIDENDS IN SOUTH AFRfiCA by UEA LOUISA VOOGT Submitted in fulfilment of the requirements for the degree MASTER OF COMMERCE in ACCOUNTING in the FACULTY OF ECO 0 IC AND NA''GEr EsNT SCENCES at the RAND AFRKAANS UNllVERSOTY SUPERMOR: D. N. STEGMANN MOVE IV ER 1996 Hierdie verhandeling is opgedra aan my man Re. Re, ek sou nie die harde werk kon volhou sonderjou toegewyde ondersteuning en liefde nie. This thesis is dedicated to my husband Re. Re, without your committed support and love / would never have been able to continue the hard work. ACKNOWLEDGEMENTS Glory to the Holy Trinity. I have been privileged to receive talents in abundance from God. My husband and best friend, thankyou for believing in my. Re, you have been true to your nature in your patience, understanding and enthusiasm for this thesis. I love you, always. My thanks to my father, Gilliam and my mother, Lallie Lotter for all the sacrifices that they have made in order to give me so many opportunities in life. I hope to have them with me in good health in this life for a long time. A special thankyou to my father. You taught me that I should always give my best in life. You taught me about tenacity. A special thankyou to my mother. Your never failing faith has always been an example to all of us. ,My thanks to the rest of my family for their continued support. My father-in-law, Andre and mother-in-law, Joey Voogt. My brother, Michiel and sister-in-law, Ansie Lotter. My sister- in-law, Hanlie Voogt. In completing this thesis, I have learnt a great deal about dividends and accounting principles. Without the regular, positive feedback and continued encouragement from Dr. Nerine Stegmann, it would not have been possible. Lastly, I had a patient, ever-present companion during the long days spent working on this thesis. Thankyou to Jack, the best Jack Russell a woman could have. Foreword S MEVATTING Individue en institusionele beleggers wat in die aandele van maatskappye bele, dra 'n bepaalde risiko om 'n opbrengs in twee vorms te verdien. In die eerste plek wil beleggers 'n kapitaalgroei realiseer by die verkoop van die aandele en in die tweede plek hoop beleggers om dividendinkomste te verdien totdat die aandele verkoop word. Dividende het 'n hoe inligtingsinhoud. Beleggers en potensiele beleggers gebruik dividende en dividende per aandeel dikwels as 'n maatstaf van die sukses van 'n maatskappy. Die doelwit van hierdie verhandeling, is die studie van 'n wye reeks van reels en aangeleenthede wat oorweeg moet word by die berekening, verklaring en betaling van dividende in die huidige Suid-Afrikaanse milieu. Die kwessie van dividende bring etlike vraagstukke na yore wat in hierdie studie.ondersoek word. Hierdie kwessies sluit 'n ondersoek in om 'n eenvormige definisie vir dividende te bepaal asook 'n gedetailleerde, kritiese analise van die gemeenregtelike dividendreels wat gebruik word in die berekening van die maksimum bedrag wat regtens beskikbaar is vir verklaring as dividende. Die berekening van wins wat regtens bekikbaar is vir verklaring as dividende, word gebaseer op die finansiele state van 'n maatskappy. Hierdie finansiele state bevat nie perfekte inligting nie en die inligting in finansiele state kan gemanipuleer word ten einde rekeningkundige wins te verhoog vir doeleindes van die berekening van dividende. Nadat die problematiek rondom finansiele state ondersoek is, fokus hierdie studie verder op die keuses wat deur direkteure uitgeoefen kan word by die bepaling van 'n spesifieke dividendbeleid wat geImplementeer moet word en die voordele en nadele van verskillende dividendbeleide. Nadat die direkteure van 'n maatskappy 'n spesifieke dividendbeleid vir implementering gekies het, gaan die studie voort om 'n aantal reels en wetsbepalings te ondersoek wat in ag geneem moet word by die betaling van dividende, voordat die direkteure die vorm waardeur dividende betaal kan word sal kies. Dividende kan in 'n wye verskeidenheid van vorms betaal word. Twee van die algemeenste vorms van dividende tans in Suid -Afrika, is die betaling van kapitalisasie aandele en skripdividende. Beide hierdie vorms van dividende het algemene gebruik geword met die Foreword inwerkingtreding van Sekondere Belasting op Maatskappye in 1993, aangesien kapitalisasie aandele vrygestel is van Sekondere Belasting op Maatskappye. Hierdie verhandeling bestudeer 'n wye reeks van aspekte rondom kapitalisasie aandele en skripdividend in detail. Die fokus van hierdie verhandeling is om lig te werp op dividende uit die oogpunt van klein individuele beleggers en meer spesifiek, swart individuele beleggers. Een van die doelwitte van die . Johannesburgse Effektebeurs is om die koopkrag van hierdie beleggers so you moontlik na die Beurs toe te kanaliseer. Aangesien hierdie beleggers gewoonlik nie genoegsame kennis oor rekeningkundige standaarde, finansiele ontleding, beleggingsbestuur en aandeelhouersregte het nie, behoort dividende meer aandag te geniet van die kant van die Beurs en van die kant van individuele maatskappye af. Hierdie groepe moet beleggers bemagtig deur genoegsame inligting in hierdie verband te openbaar. bie betaling van dividende raak egter nie net individuele maatskappye en hul beleggers nie. Die kollektiewe dividendbesluite van maatskappye in die Suid-Afrikaanse ekonomie het 'n impak op die sukses van die Heropbou-en-ontwikkelingsprogram. 'n Aantal faktore wat in hierdie verband oorweeg moet word ten opsigte van dividende, is ook in hierdie studie gedokuMenteer. Index iii ONDEX Page number CHAPTER 1 - INTRODUCTION 1 1.1. Motivation for this study 1 1.2. Purpose of this study 3 1.3. Contents of this thesis 3 1.3.1. Chapter 2 - A definition for dividends 4 1.3.2. Chapter 3 - Profit available for distribution as dividends 4 1.3.3. Chapter 4 - Imperfections in financial statements 5 1.3.4. Chapter 5 - Dividend policies 5 1.3.5. Chapter 6 - Rules for the payment of, and different forms of 5 dividends 1.3.6. Chapter 7 - Capitalization awards 6 1.3.7. Chapter 8 - Scrip dividends 6 1.3.8. Chapter 9 - Identification of problems and 7 recommendations thereto 1.3.9. Chapter 10 - Summary 7 Bibliography 8 CHAPTER 2 - A DEFINITION FOR DIVIDENDS 9 2.1. Introduction 9 2.2. Definitions for dividends 9 2.2.1. Introduction 9 2.2.2 Linguistic and legal definitions 10 2.2.3. Accounting definitions 10 2.2.4. Definitions of the Courts and the Companies Act 11 2.2.5. The Income Tax Act definition 12 2.2.6. Conclusion 21 2.3. A payment, allocation or division of some form 21 2.4. Sourced from profit, income or a fund 23 2.4.1. Introduction 23 Index iv 2.4.2. Accounting definitions for profit, income or a fund 23 2.4.3. The income concept 26 2.4.3.1. Syntactical income 26 2.4.3.2. Semantical income 27 2.4.3.3. Pragmatic income 28 2.4.3.4. Conclusion 28 2.4.4. Legally divisible profit 28 2.4.5. Conclusion 30 2.5. Made to shareholders 30 2.6. Authorised by the board of directors 31 2.6.1. Directors' legal rights and obligations 31 2.6.2. The stewardship duties of directors 32 2.6.2.1. Duty of loyalty 33 2.6.2.2. Duty of care and skill 34- 2.6.2.3. Duty of attention 34 2.6.3.. Management clause in the articles of association 34 2.6.4. Financial and treasury management 35 2.6.5. Fiduciary duties of directors 36 2.6.6. Responsibilities of directors 37 2.6.7. Shareholders' rights v directors' prerogative 40 2.6.8. Shareholder rights movements in Europe 42 2.6.9. Conclusion 43 2.7. Summary 44 Bibliography 45 CHAPTER 3 - PROFIT AVAILABLE FOR DISTRIBUTION AS DIVIDENDS 48 3.1. Introduction 48 3.2. Principles applied in Court cases on dividend matters 49 3.3. The principle of capital maintenance 49 3.4. Common law rules 51 3,5. Rule 1 - Dividends may not be paid out of share capital 53 3.5.1. Introduction 53 3.5.2. Capital maintenance 53 Index 3.5.3. South African case law 54 3.5.4. Exceptions to the capital maintenance principle 55 3.5.5. Conclusion 56 3.6. Rule 2 - Accumulated losses suffered in past trading periods may be ignored 58 3.6.1. Introduction 58 3.6.2. The nature of accumulated losses 58 3.6.3. Effect of accumulated losses on the capital fund of a company 60 3.6.4. Accumulated losses v retained earnings 61 3.6.5. Dividing results into trading periods 62 3.6.6. The advantage to an investor 62 3.6.7. Conclusion 63 3.7. Rule 3 - Provision for losses on fixed capital and depreciation of fixed capital 64 may be ignored 3.7.1. Introduction 64 3.7.2. The nature of fixed capital 65 3.7.3. The nature of losses 66 3.7.4. The nature of depreciation 67 3.7.4.1. Depreciation as a cost allocation 67 3.7.4.2. Depreciation as a means of revaluing assets 69 3.7.4.3. Depreciation as a means of reserving funds for 69 the replacement of assets 3.7.4.4. Conclusion 70 3.7.5. The rule in perspective 71 3.7.6. Conclusion 72 3.8. Rule 4 - Losses on circulating or working capital should be taken into 72 account 3.9. Rule 5 - Realised profits on the sale of fixed assets may be distributed 74 3.10. Rule 6 - Unrealised profits on the revaluation of circulating or working 75 capital may be distributed 3.11. Rule 7 - Unrealised profits on the revaluation of fixed assets may be 77 distributed 3.11.1.