Treatment of Special Items: Managerial Remuneration, Divisible Profits

In Corporate Accounting, certain items require special attention while preparing and presenting financial statements. Two such important items are Managerial Remuneration and Divisible Profits. Both are governed by specific provisions of the Companies Act, 2013 and relevant accounting standards. Their proper treatment ensures transparency, legality, and fairness in financial reporting and profit distribution.

Managerial Remuneration:

Managerial remuneration refers to the compensation paid to the company’s managerial personnel, such as directors, managing directors, whole-time directors, and managers, for their services to the company. It includes salary, commission, sitting fees, perquisites, and any other monetary or non-monetary benefits.

Legal Provisions (As per Companies Act, 2013):

• According to Section 197, the total managerial remuneration payable by a public company to its directors, including the managing and whole-time directors, and its manager, in respect of any financial year shall not exceed 11% of the net profits of that company.

• This limit is calculated as per Section 198, which prescribes the method of computing net profits for remuneration purposes.

• If a company has no profits or inadequate profits, remuneration may be paid as per Schedule V, which allows payment within prescribed limits based on the company’s effective capital, with approval of the Board or shareholders if required.

• The sitting fees paid to directors for attending board or committee meetings are not included in this 11% ceiling, provided they are within the prescribed limit.

Accounting Treatment:

• Managerial remuneration is treated as a charge against profits and recorded as an expense in the Statement of Profit and Loss.

• It should be properly disclosed under the head Employee Benefits Expense or separately as Managerial Remuneration in the financial statements.

• If remuneration exceeds statutory limits, company approval through special resolution and sometimes Central Government approval (in specific cases) is required.

• Proper disclosure in Notes to Accounts is mandatory, mentioning the total amount paid or payable, along with the approval details.

Example:

If the company earns ₹1,00,00,000 as net profit (as per Section 198), the maximum managerial remuneration payable cannot exceed ₹11,00,000 (i.e., 11% of net profits) without special approval.

Divisible Profits

Divisible profits refer to that portion of a company’s profits which is legally available for distribution among shareholders as dividends after meeting all legal obligations, expenses, and transfers. Not all profits earned by a company are divisible; only those profits that are realized and legally permitted to be distributed can be treated as divisible profits.

Legal Provisions (As per Companies Act, 2013):

• Section 123 governs the declaration and payment of dividends. It states that dividends can be declared only out of:

  1. Current year’s profits after providing for depreciation, or

  2. Previous years’ undistributed profits, or

  3. Both, or

  4. Money provided by the government in the case of a government guarantee.

• Before declaring dividends, the company must transfer a prescribed portion (if any) of profits to reserves, as decided by the Board of Directors.

• Dividends cannot be declared out of capital or unrealized gains.

Computation of Divisible Profits:

To determine divisible profits, the following adjustments are generally made:

1. Add: Profits from operations, other incomes, and reserves available for distribution.

2. Less:

   • Previous losses (if any)

   • Depreciation as per Companies Act

   • Managerial remuneration and taxes

   • Provisions for contingencies, doubtful debts, and statutory reserves

   • Transfer to general reserve (if applicable)

The remaining amount represents profit available for distribution as dividend.

Accounting Treatment:

• Once divisible profits are computed, the company declares dividends out of them.

• The proposed dividend and corporate dividend tax (if applicable) are shown as appropriations of profit in the Statement of Profit and Loss (Appropriation Account).

• Dividends declared but not yet paid are shown as current liabilities under the head “Other Current Liabilities.”

• Unpaid dividends for more than seven years must be transferred to the Investor Education and Protection Fund (IEPF) as per the Act.

Example:

If a company’s net profit after all adjustments is ₹50,00,000 and it decides to pay ₹10,00,000 as dividends, the remaining ₹40,00,000 will either be retained in the business or transferred to reserves.