When a reporting entity is materially restricted from paying dividends, they should describe the restriction in the footnotes.
S-X 4-08(e) requires footnote disclosure of the following:
- The most significant restrictions on the payment of dividends, including their sources, their pertinent provisions, and the amount of retained earnings or net income restricted or free of such restrictions
- The amount of consolidated retained earnings that represents undistributed earnings of 50% or less-owned entities accounted for by the equity method
- The nature of any restrictions on the ability of consolidated and unconsolidated subsidiaries to transfer funds to the parent, and the amounts of such restricted net assets
The disclosure should include not onlya description of the restriction, but also a statement of the amount of retained earnings restricted or not restricted. Reporting entities should not make any statement that a portion of retained earnings is "available" for dividends because this statement ignores the possibility that it may be unwise or impractical, for business reasons, to pay a dividend. If a reporting entity chooses to make such a statement, we recommend they discuss the disclosure with legal counsel.
FigureFSP5-2 is an example footnote disclosure of a restriction on retained earnings.
FigureFSP 5-2
Example disclosure — retained earnings restrictions
Note D — At December 31, 20X1, consolidated retained earnings was restricted in the amount of $3,500,000, representing the cost of 170,000 shares of common stock held in the treasury.
