FRC’s Financial Reporting Lab issues report on disclosure of dividend policy and practice

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25 Nov, 2015

The Financial Reporting Council’s (FRC's) Financial Reporting Lab has published a report on the disclosure of dividend policy and practice by companies. The report covers issues relevant to all sizes of listed company and focuses primarily on disclosures in the annual report, although a range of company communications are considered. It is intended to act as practical guidance to assist listed companies in providing dividend disclosures to investors and incorporates best practice examples.

Both companies and investors agree that dividend policy and practice disclosures are fundamental to evaluate investment decisions and to assess management’s stewardship. The FRC’s Financial Reporting Lab project on the disclosure of dividend policy and practice was prompted by an interest from a group of long-term institutional investors in the capital maintenance regime and then broadened to cover best practice disclosure of dividend policy and practice.

The report covers the following topics:

  • The importance of good dividend policy disclosure – consensus is that dividend disclosures are not being clearly articulated and that there is frequently a disconnect between any description of the dividend policy and how that policy has been implemented in practice.
  • The characteristics of good dividend policy disclosure i.e. what ‘good’ looks like. This should cover why the particular policy has been chosen, what the policy will mean in practice and the timeframe over which the particular dividend policy is likely to apply. Companies should also seek to address any risks and constraints associated with their policy in their disclosure.
  • Dividend declaration disclosures– investors have expressed a desire to see the quality of information in dividend disclosures enhanced to include information including:
    • the period to which the dividend relates;
    • the amount per share and aggregate amount;
    • the remaining steps necessary to approve the dividend e.g. shareholder vote at AGM;
    • the level of resources available to the parent including detail on how the dividend will be funded.
  • What investors want from disclosures on dividend resources available to the parent - including elements of distributable profits disclosure. The FRC has confirmed their understanding that there is no requirement under the Companies Act 2006 to disclose the amount of distributable profits. However, as the level of realised profits can be significantly different to the balance in retained earnings, participants in the FRC Lab’s project indicated that the parent company’s statement of changes in equity is a useful place to provide such a disclosure as it can clarify the distributable/non-distributable split of the company’s reserves and/or profit. An example of such a disclosure can be found in Appendix 4 of the report.
  • The placement of disclosures - currently disclosures on dividends are spread across a wide range of company information with investors focusing primarily on preliminary announcements, presentations and annual report disclosures. Appendix 2 of the report highlights the importance of the interaction between the dividend and reporting cycles when providing dividend disclosure. 

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