Guidance on the determination of realised and distributable profits

Print publication


We have written previously on the pitfalls that surround the making of a dividend and the potentially draconian consequences of getting it wrong.

Central to the validity or otherwise of a dividend is, very often, the determination of realised profits and losses. The statutory provisions of the Companies Act 2006 only take one so far and, other than some case law, the gap is largely filled by the guidance published by the Institute of Chartered Accountants of England and Wales (ICAEW).

In March this year, the ICAEW published an exposure draft of updated guidance. The current guidance – TECH 02/10 – has been in place for some years now and the ICAEW has decided that a review is due.

That said, the proposed amendments do not appear to be particularly extensive. Points to note from the exposure draft include:

  • additional guidance on the meaning of distribution. In particular, the guidance confirms the case law that a transaction at an undervalue is capable of being a distribution.  The guidance also clarifies that a distribution can arise from an assumption of a liability if the company does not receive consideration of the same amount
  • additional guidance on the meaning of distributions in kind. In determining the amount of a distribution in kind, section 845(3) states that the company’s profits available for distribution are treated as increased by the amount (if any) by which the amount or value of any consideration for the disposition exceeds the book value of the asset.  The draft guidance now adds that the balance may be nil after the transfer of the asset when the asset is transferred at below book value such as to eliminate the whole of the positive balance of profits available for distribution
  • there is additional guidance on the consequences of accounting for intra-group off market loans, including the accounting treatment for an interest free loan from a parent company to a subsidiary, from a subsidiary to a parent company and from one sister subsidiary to another
  • an expanded section on deferred tax. Deferred tax should generally be regarded as a realised loss; although, in certain circumstances it may be treated as an unrealised gain
  • guidance on “top slicing”, namely the practice where an asset is sold partly for qualifying consideration and partly for other consideration (e.g. a mixture of cash and land) and any profit arising is a realised profit to the extent that the fair value of the consideration received is in the form of qualifying consideration. The guidance notes that to apply the top slicing in a hive down or hive across, any liabilities should first be deducted from the amount of qualifying consideration received.

Consultation on the draft is open until 9 June.

WM comment

The ICAEW guidance is of vital importance in helping to determine the availability of distributable profits in what can be a difficult area. This will undoubtedly remain the case once the current draft guidance has been finalised.  So far at least, there is nothing to cause alarm in the draft guidance; rather, the draft offers reassurance in supporting best practice positions, such as that transactions at an undervalue may, depending on the circumstances, amount to a distribution.