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Distributable Profits


Those unfamiliar with the law on distributions in the UK might assume that the decision by a UK company to pay a dividend depends on the need to retain cash to develop the business and to ensure that the claims of creditors can be met as they fall due. These factors are important but are only part of the story. Dividends – or distributions to use the legal term – can be made only out of ‘profits available for distribution’ as shown in the ‘relevant accounts’ drawn up in accordance with the applicable UK law and accounting standards. A dividend cannot, therefore, be paid in the absence of accumulated profits regardless of the extent of surplus cash balances or unused borrowing facilities.

Another complication is that only ‘realised’ profits may be distributed. This principle was not seen as contentious or difficult to apply when it was introduced into the law in the early 1980s. The fundamental accounting concept of prudence dictated that profits were recognised only when realised in the form either of cash or of other assets, the ultimate cash realisation of which could be assessed with reasonable certainty.

Financial reporting has moved on a lot since then.  The application of the law in the context of present day accounting standards is comprehensively addressed in TECH 02/17 Guidance on realised and distributable profits under the Companies Act 2006 issued jointly by the Institute of Chartered Accountants in England and Wales (ICAEW) and the Institute of Chartered Accountants of Scotland (ICAS) in April 2017.

TECH 02/17

TECH 02/17 supersedes the previous guidance contained in TECH 02/10 and represents the conclusion of a project to update that guidance that began in March 2016 with proposals contained in TECH 05/16. Those proposals were, in general, widely supported but many improvements have been made in the light of the comments received.

TECH 02/17 updates TECH 02/10 to remove references to old UK GAAP, removes obsolete material and updates it more generally for new and revised standards. It has been made more “GAAP neutral” and the previous emphasis on the effect of transition to IFRSs has been removed. The overall structure of the previous guidance has been retained, including paragraph numbering so far as possible.

In addition to updating references, TECH 02/17 also contains a number of substantive changes to the requirements in TECH 02/10 including:

  • Guidance about the definition of a distribution. This is expressed in general terms but then applied to certain off-market intragroup loans (e.g. an interest free loan from a subsidiary its parent).
  • Guidance to address the consequences of accounting for intragroup off-market loans in accordance with FRS 102. These are recognised initially at fair value rather than face value. The guidance addresses the nature of the difference in value (between fair value and book value) and the distributable profits implications for the treatment of subsequent interest income and expense.
  • The section dealing with retirement benefit schemes has been completely rewritten on a simplified basis because the previous material was very outdated.
  • Guidance has been provided to address the consequences of a change in the law concerning distributable profits in relation to long-term insurance business.
  • The guidance on deferred tax has been reorganised. This has highlighted the fact that in some (quite rare) circumstances a credit to profit or loss arising from recognition of a deferred tax asset may be an unrealised profit.

The more substantive changes to TECH 02/10 are summarised above. A mark-up comparing TECH 02/17 with TECH 02/10 is available for those who are interested in the greater detail of the changes on the ICAEW website.  TECH 02/17 does not contain an effective date but should be regarded as taking immediate effect.

Our related Need to know publication on TECH 02/17 is available here

Disclosure of distributable profits

There is no requirement under law or accounting standards for financial statements to distinguish between realised profits and unrealised profits or between distributable profits and non-distributable profits.

In November 2015, Financial Reporting Council’s (FRC's) Financial Reporting Lab published a report on the disclosure of dividend policy and practice by companies in response to calls from a group of long-term institutional investors wanting to see greater transparency around dividend policy and distributable reserves.  Both companies and investors agree that dividend policy and practice disclosures are fundamental to evaluate investment decisions and to assess management’s stewardship.  However the FRC have confirmed their understanding that there is no requirement under the Companies Act 2006 to disclose the amount of distributable profits. 

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.

A follow up report was published in October 2017.  The objective of the report was to assess how companies had responded to suggestions for enhanced disclosures included within the Financial Reporting Lab's November 2015 report and to provide examples of developing practice in this area. The publication of this report does not change the position regarding disclosure of distributable reserves in paragraph 2.25 of TECH 02/17.

In March 2018, as part of a wider consultation on insolvency and corporate governance, the Government sought views on, amongst other things, whether there was sufficient transparency and accountability to shareholders for dividend decisions and broader choices about how any surplus profits generated by a company should be allocated. A Government response, in August 2018, identified potential ways to strengthen disclosure including requiring companies to disclose the audited figure for available reserves and distributable profits in their annual report and accounts. It also indicated that should investor pressure and new section 172 reporting requirements not bring about improvements to existing practice, it may introduce legislation to require companies to disclose and explain their capital allocation decisions.

The Investment Association in May 2019, called on companies to improve the transparency of their approach to paying dividends. The IA has indicated that it will develop best practice guidance on a ‘distribution policy’ in Autumn 2019. It will also make recommendations to the Government as to whether a shareholder vote on the distribution policy and/or yearly distributions should be mandatory.


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