SHOULD DIVIDEND BE DECLARED FROM PAPER PROFIT?

Since the introduction of the inter bank foreign exchange market in June, the potential has existed for Nigerian group of companies with subsidiaries abroad to boost earnings with paper profits.

These are profits that accrue in the course of consolidation of group accounts in reporting currencies other than originating currency or when such profit is due to asset revaluation.

In the case of consolidation, currency value related profit can come from conversion of profit made abroad or from conversion of foreign asset values.

In the case of profit earned abroad, that is normally not paper profit because it is already realised. It is the one from asset revaluation that constitutes paper profit. That is, profit recognisable for the period but that can only be realised if the asset revalued is sold.

In view of the fact that paper profit is inherent and not realised yet, declaring any dividend from it could in fact jeopardise the liquidity position of the company since cash is the lifeblood of business.

But of course, dividend recommendation is an exclusive matter for the board of directors to decide but sometimes, corporate politics, not corporate going concern, decides.

Where it becomes a public issue is when the company in question like Banks, depend on customers money for their operations. Where such is the case, dividend from paper profit could be dangerous for liquidity and capital adequacy and should be discouraged.

For example, from the nine months figures released by some banks so far, financial assets revaluation gain is propping up the bottom line and indeed, many such banks could inadvertently declare dividend portions from paper profit come year end

Zenith Bank recognised N31015m revaluation gain in its nine months to September and this comes to 25.6% of its profit before tax.

Guarantee Trust Bank on the other hand reported N96639.7m revaluation profit which came to 68.6% of the profit before tax for the period.

For smaller banks, dependence on paper profit could be more crucial. For example, Unity Bank PLC recognised N5472.9m from foreign exchange related revaluation which ended up being 143.8% of its profit before tax for the nine months.

Decoded: Unity Bank would have landed in loss league but for the revaluation profit.

Should these banks and other companies  be allowed to declare dividend from such paper profits?

The ideal answer should be no especially as all but the very small banks are presently providing huge sums for potential bad debts.

Conservative boards of directors should buy the logic in this readily but in case they don't, oversight government organisations have a duty to ensure only realised profit are distributable.

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