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Distributable profits guidance updated

New guidance sets out what counts as a distribution, focusing on the purpose and substance of a transaction, writes LSCA Technical Committee member Barbara Griessner.

Barbara Griessner

July 2017

TECH 02/17BL Guidance on realised and distributable profits under the Companies Act 2006 has been issued in April 2017 by the ICAEW and ICAS (‘the Institutes’).

The introduction of new UK GAAP was seen as a good opportunity to update the existing guidance on realised and distributable profits in Tech 02/10 to reflect the new accounting framework and to refresh the wording in some places.

The new Tech explains, as did the old one, the statutory procedures in relation to distributions. It includes an expanded explanation of the case law on what counts as a distribution; it doesn’t matter what label a transaction is given, but it is the purpose and the substance of a transaction that matters.

Particular reference is made to transactions with shareholders or sister companies at an undervalue. This is relevant to intra-group movements of assets and businesses that might affect the profits flow to the top company.

  • Help is provided for the first time to address the accounting consequences for intra-group off-market loans under FRS 102 (or IFRSs), which are recognised initially at fair value rather than face value (by lender and borrower), for example an upstream interest-free term loan is a distribution by the lender.
  • While the chapter on pensions has been completely rewritten, such as deleting outdated references to SSAP24, the principles are unchanged. However, they are particularly relevant under FRS 102, as at least one entity in a group pension scheme will recognise the pension surplus or, usually, deficit – a major effect on distributable profits in that entity which potentially affects the profit flow to the top company.

The guidance is equally applicable to companies preparing their accounts under IFRS or UK GAAP.

Profits available for distribution continue to be the focus of investors. Investors have said that they believe that information over the quality of reserves, i.e. the ability of a company to make distributions, is relevant. Although the Tech does not contain provision on disclosures, companies might choose to provide information on the level of distributable reserves to provide transparency.

Barbara Griessner is Director at KPMG’s technical accounting department and member of the LSCA Technical Committee.

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