FRC’s Financial Reporting Lab issues report as to how companies have responded to investor calls for better disclosure of dividends

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20 Dec, 2016

The Financial Reporting Council’s (FRC's) Financial Reporting Lab (“the Lab”) has published a report as to how companies have responded to investor calls for better disclosure of dividends as highlighted in its report ‘Disclosure of dividends – Policy and practice’, published in November 2015.

The report includes:

  • A summary of the findings from the November 2015 report;
  • How practice is changing based upon the Lab’s review of dividend disclosures in annual reports published between December 2015 and July 2016;
  • Examples of good practice; and
  • Areas for further improvement.

Findings from the November 2015 report

The key findings from the November 2015 report are: 

  • Good dividend policy disclosures should provide:
    • an understanding of the board’s considerations in setting the policy,
    • the rationale for the approach selected, and
    • sufficient detail to understand how the policy will operate
  •  Good dividend practice disclosures should provide:
    • the key judgements and constraints considered by the board in applying the dividend policy,
    • the availability of dividend resources (cash and distributable profits) to pay dividends, and
    • clear linkage from the disclosed policy to the application of the policy in the period. 
  • Disclosure on the availability of resources - needed to pay a sustainable dividend stream is considered useful information to investors. The report indicates that investors consider that there might be a range of disclosures that a parent company might make depending on whether the resources of the company are ‘Abundant’, ‘Sufficient’ or ‘Insufficient’.  The Lab has prepared an aide to assist companies when making this disclosure. 

How practice is changing

Following the November 2015 report, the Lab undertook a review of FTSE 350 companies’ dividend disclosures to assess how practice might have changed.  177 companies published their annual reports within the scope period (between December 2015 and July 2016) and 120 reports were reviewed in detail with 28 showing improved disclosures.  Improvements included 11 companies providing details of their dividend policy and how it is intended to operate and 16 companies providing greater information as to the relevance of their dividend resources, for example, providing a distributable profits figure for the parent company. 

Areas for further improvement welcomed by investors

The report provides example of good practice disclosures which companies might wish to follow.  Additionally it highlights areas for further improvement including:

  • more detailed disclosure of how dividend policies operate in practice, with more clarity on factors considered in both the setting of the policy and in dividend declaration; and
  • disclosure of risks and constraints where they impact dividend policy and declaration decisions (especially pertinent to concerns around pension deficits, the potential impact of Brexit and other factors that may have a bearing on capital management decisions). 

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