On 30 June 2009, the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland published a guidance paper on the determination of realised profits and losses for the purposes of making distributions under the Companies Act 2006 (the Act). The substance of the guidance is largely unchanged from the draft issued back in November 2008.
Under Part 23 (distributions) of the Act, a company may make a distribution out of profits available for that purpose. A company's profits available for distribution are its accumulated realised profits (so far as not previously distributed or capitalised) less its accumulated realised losses (so far as not previously written off in a reduction or reorganisation of its share capital). The extent to which profits or losses fall to be treated as "realised" requires to be determined in accordance with accounting principles generally accepted at the time the "relevant accounts" (for the purposes of the distribution) are prepared.
The paper provides guidance (along with illustrative examples) on the determination of "realised" profits and losses and reflects accounting standards as at 1 June 2009.
We set out below some of the points dealt with in the paper.
Reserves arising from share capital reduction
The paper sets out the circumstances in which a reserve arising from a reduction in a company's capital is to be treated as realised profit in accordance with The Companies (Reduction of Share Capital) Order 2008 which came into effect on 1 October 2008. Those circumstances include a reserve arising from a reduction of capital by (i) an unlimited company, (ii) a private company limited by shares where the reduction is supported by a solvency statement from the directors, and (iii) a limited company where the reduction has been approved by the court (unless otherwise ordered by the court).
Distribution of non-cash assets
The paper comments on the codification in sections 845 and 846 of the Act of the approach previously taken by leading legal practitioners in relation to the distribution of non-cash assets following the Aveling Barford case. Those sections apply to distributions made on or after 6 April 2008 and provide that:
- if a non-cash asset is transferred for a consideration which is not less than its book value, then the amount of the distribution is zero. That is, the transfer can be lawfully made if the company has profits available for distribution even if they are only 1p. In such circumstances, profits available for distribution are deemed to be increased by the amount by which the consideration exceeds the book value of the relevant asset;
- if a non-cash asset is transferred for a consideration which is less than its book value, the amount of the distribution is the difference between the consideration and the book value of the asset. As such, the transfer can lawfully be made only if the company has profits available for distribution of at least the amount of the difference.
Date of distribution
The paper gives guidance on when a dividend payable by a subsidiary company can be accrued in the accounts of its parent and taken into account in determining the profits available for distribution of the parent. In accordance with applicable accounting standards, a dividend payable by a subsidiary is accrued only when it is "appropriately authorised and no longer at the discretion of the entity". In the case of a final dividend, this will be when the dividend is declared by the company in general meeting (or by written resolution in the case of private companies). In the case of an interim dividend, this will be when the dividend has been paid or when the subsidiary has assumed a legally binding obligation to pay the dividend. An interim dividend declared by the directors of a company does not, under common articles of association, create any such legally binding obligation. The paper provides helpful guidance on the circumstances in which a legally binding obligation to pay an interim dividend will be considered to have been created.
View the guidance paper (131 page pdf).