This  follows a number of accounting problems over dividend payouts and caculations of distributable profits, where company reporters have fallen foul of the Companies Act 2006 by mistake.

In the latest quarterly reporting period, Hargreaves Lansdown, Domino's Pizza and Dunelm all issued warnings about possible dividend payment issues.

The technical release contains the institutes’ latest guidance on how to identify, interpret and apply the principles for determining realised profits and losses for making distributions and dividend payments under the Companies Act.

The document is based on guidance released in 2010 with updates proposed and issued for comment in 2016 to reflect changes in law and accounting standards since 2010, particularly the introduction of FRS 102.

Most of the comments received in response to the 2016 release focussed on the definition of a distribution and the consequences of accounting for off-market intragroup loans in accordance with FRS 102. In the former case, additional footnotes have been added to make it clearer that the guidance reflects case law. In the latter case, the material has been extensively redrafted to address comments received but without changing the overall conclusions reached.

The new technical release also addresses the consequences of the change in the law concerning distributable profits in relation to long-term insurance business made by The Companies Act 2006 (Distributions of Insurance Companies) Regulations 2016 (SI 2016/1194) which were made on 7 December 2016.

The institutes state that they are aware of the calls by some investors for greater transparency about dividend policy and capacity including distributable reserves. The FRC’s Financial Reporting Lab issued a report ‘Disclosure of dividends – policy and practice’ in November 2015 exploring how companies can make dividend disclosures more relevant for investors. An update to this was issued in December 2016.

Paragraph 2.25 of the technical release states that 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. The institutes consider, based on legal advice, that this is a correct statement of the law. They state that listed companies may, however, wish to consider how to address the calls for greater transparency from the investor community.

Recent changes to accounting standards do not raise any fundamentally new issues in relation to realised and distributable profits. The application of new or revised standards may lead to changes in the timing and amount of profit recognised. This may occur due to changes in the recognition of revenue or in the recognition of costs.

The effect of changes in accounting policy may be to reduce or even eliminate a company’s net realised profits. That would not render unlawful a distribution already made out of realised profits determined by reference to ‘relevant accounts’ which had been prepared in accordance with generally accepted accounting principles applicable to those accounts. However, for distributions made in the period in which a new or revised standard is to be adopted, the application of the common law capital maintenance rule in relation to distributions should be considered.

The technical release represents generally accepted practice at 31 December 2016 in relation to the meaning of realised profits. The institutes say that the revisions introduced now should not be used to question the lawfulness of distributions made at an earlier date. However, balances on reserves will need to be re-examined in the light of the technical release and the position should be re-assessed before a distribution is made.

An exception to this is the additional guidance about the definition of a distribution in paragraphs 2.6A to 2.6D of the new guidance, which is based on legal advice and is not a question of generally accepted practice. Therefore, it is possible that some transactions previously entered into were distributions at the time they were entered into and would have been unlawful distributions in the absence of adequate distributable reserves. For example this may apply to some intragroup loans on off market terms.

TECH 02/17BL ICAEW guidance on realised and distributable profits under the Companies Act 2006 is available here

The document is available to download  icaew_tech_05_16bl_guidance_on_realised_and_distributable_profits_under_the_companies_act_2006.pdf