The Financial Reporting Lab was set up by the FRC to help improve the effectiveness of corporate reporting in the UK by bringing companies and investors together to look at corporate reporting and come up with innovative ideas to improve it. This Lab report on the disclosure of dividends was prompted by concerns from some institutional investors who had obtained a Counsel's opinion that the disclosure of distributable profits is always required as a matter of Company law. Such disclosure is not currently common practice and while the FRC's view is that it sees, in some instances, that such disclosure may be useful, it does not consider that the Companies Act 2006 requires companies to identify separately distributable profits on its balance sheet. In our view the FRC's position is correct as a matter of law.
As there were divergent views and practices in this area, it was agreed that it would be useful for the Lab to explore aspects of distributable profits disclosure that would be helpful and practical. The scope of the report was then widened so it would focus on good dividend disclosure. The FRC believes the issues raised in this report are likely to be relevant to all listed and AIM quoted companies. Although it focuses on the annual report, the report also considers other channels used to communicate dividend policy and practice.
Dividend disclosures are considered important to companies and investors as they are important in demonstrating and assessing board stewardship and the investment case. The report shows that investors want good dividend disclosures to answer the following questions:
- why the company has chosen the dividend policy it has
- what the policy will mean in practice
- what the risks and constraints of the policy are
- what has been done in practice to deliver the policy
Investors are also keen that all disclosures on dividends are grouped together or that they are linked and easy to find.
The report also considers the issue of disclosure and practice in relation to the circumstances in which companies expect to pay special dividends or buy back shares.
The Lab project report 'Disclosure of dividends – policy and practice' can be found here and the FRC press release here.