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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 02/10 ‘Guidance on the determination of realised profits and losses in the context of distributions 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). This is available on the ICAEW website.  In March 2016 the ICAEW and ICAS jointly issued an exposure draft of revised guidance to assist companies in determining whether profits made are realised and can be paid out as dividends.  This guidance will replace Tech 02/10,

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.

                

 

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.