A dividend in arrears is a dividend payment associated with cumulative preferred stock that has not been paid by the expected date. These dividends have not been authorized by the board of directors, because the issuing entity does not have sufficient cash to make the payment. Instead, the existence of this nonpayment is disclosed in the footnotes that accompany the financial statements.
Dividends in arrears may pile up over several subsequent payment dates, if the financial circumstances of a business do not allow for these payments. If the situation ever improves, the board of directors will then authorize that a portion or all of these dividends be paid. Once the authorization is made, these dividends appear in the balance sheet of the issuing entity as a short-term liability.
When paid, dividends in arrears go to the current holder of the related preferred stock. No payments are made to the person or entity that held the stock at the time when the dividends were in arrears.
The existence of any dividends in arrears is a concern to common stockholders, since they cannot receive any dividends until the full amount of the dividends in arrears has been paid to the preferred stockholders.