Arrears definition

In general, the term arrears means that something is late in being paid. For example, a debt payment could be in arrears, as could an account payable to a supplier, or a bond or interest payment to investors. In all of these cases, a company may enter into negotiations to revise the underlying debt agreement, either to reduce the amount or prolong the term of the payment.

Most commonly, arrears refers to a situation where a company has preferred stock outstanding, the stock has a cumulative dividend feature, and the company is unable to pay the dividend. A cumulative dividend is a dividend that remains a liability of the company until such times as it pays the dividend. During the period when the company is liable for the dividend but has not yet paid it, the dividend is said to be in arrears.

While the dividend is in arrears, the legal agreement associated with the preferred stock usually prevents the company from issuing any dividends to common stockholders, and may possibly contain additional restrictions on a company's use of cash. Further, the company must disclose the amount of the dividend in arrears in its financial statements.

Any type of payment that is in arrears is certainly a sign of financial difficulty that a creditor or investor should be wary of, but a continuing pattern of payments in arrears will likely trigger some sort of restrictive action, such as calling a loan early, an increase in the interest rate charged, or a reduction in credit.