Disclosure of distributable reserves: a welcome but complex challenge

In its wide-ranging consultation paper Restoring trust in audit and corporate governance, the government notes there is support for stronger disclosure requirements on distributable reserves.

While the legal framework is well-established, high-profile examples of companies paying out significant dividends shortly before profit warnings or insolvency have raised questions about its robustness.

At the same time, the white paper acknowledges the complexities involved in establishing effective disclosure requirements and the need to find a balance between presenting helpful information to investors with the cost to preparers of providing the information. 

Overview of proposals

The government is proposing to introduce requirements to:

• Disclose distributable reserves in the financial statements. This would involve individual companies within the agreed scope (or, in the case of a group, the parent company only) disclosing in their annual reports the total amount of reserves that are distributable. Where it is not possible to calculate the number with precision, companies will be permitted to report a “not less than” figure for their distributable reserves. 

• Disclose estimates of a group’s dividend-paying capacity: This proposal would require a parent company to estimate and disclose the amount of potential distributable profits across the group that could, in principle, be passed to the parent company for the purpose of paying future dividends to shareholders. Narrative disclosures would be provided to explain any major constraints on the ability of a subsidiary to pay its distributable reserves to the parent. There would also be a degree of discretion about how to present these estimates and to allow parent companies to select, on a reasonable basis, which group companies to include in the assessment. 

The proposed disclosures would apply to listed and AIM companies only.

At this stage, the government is not proposing further requirements for companies to report on their distribution policy and general approach to capital maintenance as it believes that the disclosures proposed above together with the existing s172 reporting requirements would be sufficient in this respect.

Initial reactions

Initial ICAEW views are that the requirement for companies to disclose their distributable reserves will be helpful but should be reported as part of a wider package of information on the company’s overall capital maintenance policy.

This package of information should include details of the company’s (or parent company in the case of a group) overarching policy on distributions/dividends, how the policy has been implemented, the availability of cash, and any associated risks, judgments and constraints across the group. 

We are aware of major concerns with the proposal for parent companies to estimate the group’s dividend-paying capacity due to the complexities involved. As such, we suggest that this should not be introduced as a mandatory requirement, at least not without further extensive consultation. 

If you have any views on the BEIS proposals outlined in this article as well as on ICAEW’s initial views please let us know at frfac@icaew.com