IASB member discusses returns, reinvestment opportunities and dividend distribution

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Feb 08, 2019

On February 8, 2019, the International Accounting Standards Board (the Board) released an article by Board member Nick Anderson, which discusses corporate performance and how investors seek to understand the quality of the profit number, not just the amount of earnings.

When assessing the sustainability of future profits of an entity, Mr. Anderson notes that investors will consider questions such as:

  • How much capital has the business deployed to generate its level of profit?
  • How persistent are earnings likely to be into the future?
  • Does net profit include gains or expenses that are unlikely to reoccur?
  • Is the pattern of future profits likely to exhibit volatility or cyclicality?
  • To what extent are profits supported by cash flow generation?
  • What are the long-term risks faced by the business, including material environmental and social factors?

And while they draw on the financial statements, management commentary and multiple other information sources, "no number in isolation can adequately capture corporate performance".

He goes on to discuss cash flows, dividend regulations, and accounting requirements, noting that while accounting is an important piece of information it is just "one piece of the jigsaw". Dividend policy reflects many other factors such as reinvestment opportunities, financing needs, the risks faced by the company, legal constraints and incentive arrangements - and all of these factors differ by company, by jurisdiction and over time. Therefore, Mr. Anderson notes, responsibility to determine whether dividend payments are appropriate is beyond the remit of the Board. But he concludes:

However, there is no impediment to complementing high quality financial statements prepared in accordance with IFRS® Standards by providing additional disclosures about dividend policies and dividend payments, including any disclosures needed to meet jurisdiction requirements.

Review the full article on the Board's website.

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