Deloitte comment letter on the ICAEW and ICAS exposure draft of updated guidance on realised and distributable profits under the Companies Act 2006

Published on: 20 Jun, 2016

We have published our comment letter on TECH 05/16BL: Exposure draft of updated guidance on the determination of realised profits and losses in the context of distributions under the Companies Act 2006.

Overall we support the proposals.  Our key comments, which are expanded upon, where necessary, in the appendix to the comment letter, are as follows:

·        Although the existing guidance in TECH 02/10 has stood the test of time, we welcome the amendments that are proposed to remove obsolete material and update references as a result of changes to IFRSs and UK Accounting Standards (notably the introduction of FRS 102).  In this context we also fully support the complete re-write of the guidance on retirement benefit schemes in the context of IAS 19 Employee Benefits.

·        We welcome the additional guidance concerning the definition of a distribution for the purposes of Part 23 of the 2006 Act, clarifying that no matter what ‘label’ is put on a transaction it is the purpose and substance of a transaction that is required to be considered in determining whether a distribution has been made.  This clarification is especially important when considering off-market intragroup loans under both IFRSs and FRS 102 as the guidance now confirms that as well as being accounted for as a distribution under the relevant standards, such transactions at an undervalue are also distributions as a matter of law.  This is something that may have been overlooked in the past because a distribution was not recognised for accounting purposes.  

·        The draft guidance addresses a number of new issues that have arisen in practice.  However, there are two additional issues which we believe should also be addressed in the updated technical release as more fully explained in the appendix:

-        Whether a profit arising on a debt for equity swap can be regarded as a realised profit even if it is legally represented by share capital or share premium. This does not affect the amount of profits available for distribution because these amounts are legally capital.  However, the question of whether they are realised profits affects whether they can be included in the profit and loss account for Companies Act accounts (including those prepared under FRS 101 and FRS 102) as more fully explained in the Appendix.

-        The implications of the transfer of tax losses for nil consideration within a group and whether such a transfer is to be regarded as a distribution for the purposes of Part 23 of the 2006 Act. 

·        We support the conclusions reached on the distributable profits implications of loans made between group companies at below market rate.  The conclusions reached in the exposure draft are dependent on the transactions not being regarded as linked.  Although justification for this is provided in paragraph 9.51 we would welcome further explanatory material supporting the conclusions reached. We also note that the conclusion concerning interest receivable being a realised profit is dependent on an assumption that the loan will be repaid at its face amount in cash at maturity.  The guidance should make this an explicit assumption and highlight the consequences which may follow if this is not the case.

·        We have some concerns regarding the guidance contained within the new paragraph 3.17D on the treatment of credits in profit and loss for deferred tax which have not arisen as a result of a realised loss.  The guidance suggests that where such profits result in the recognition of a deferred tax asset they will be regarded as unrealised.  Such circumstances are likely to be rare and may be difficult to identify.  We believe that generally accepted accounting practice is to treat such deferred tax credits recognised in profit or loss as realised profits.  If this were not so, they would have to be excluded from the profit and loss account for Companies Act accounts.  In practice, such adjustments are not made.

·        Although supportive of the drafting in TECH 05/16BL, we highlight in the appendix some suggested drafting improvements.

The full comment letter can be downloaded below.


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