Updated guidance on realised and distributable profits issued
James Barbour reports on updated guidance on distributable profits.
Updated guidance (Tech 02/17 BL) on realised and distributable profits under the Companies Act 2006 (as amended) “the Act” has been issued by ICAS and the Institute of Chartered Accountants in England and Wales (ICAEW).
The purpose of the guidance is to identify, interpret and apply the principles relating to the determination of realised profits and losses for the purposes of making distributions under the Act.
The guidance is based on that previously issued as TECH 02/10 in October 2010 but has been updated as proposed in TECH 05/16 which was issued for comment in March 2016. For the convenience of users, paragraph numbering has been kept consistent with TECH 02/10 so far as possible and consequently some paragraph numbers are not used where material has been deleted or moved.
This guidance should be referred to in the determination of realised profits and losses under the Companies 2006.
It represents generally accepted practice at 31 December 2016 in relation to the meaning of realised profits.
What has changed?
Whilst many of the revisions to TECH 02/10 made by this Technical Release represent principles that were generally accepted prior to that date, 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.
It should also be noted that the additional guidance about the definition of a distribution in paragraphs 2.6A to 2.6D 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.
The Act permits companies to prepare their individual accounts using UK GAAP or EU-adopted IFRSs. This guidance applies to companies reporting under both UK GAAP and EU-adopted IFRSs except where otherwise stated. The guidance has been written on the basis of ‘full’ IFRSs as issued by the IASB but should be equally applicable to EU-adopted IFRSs.
English and Scottish Counsel have confirmed that the guidance is consistent with the law at 31 December 2016. Counsel accept no responsibility (other than to the Institutes) in relation to advice ascribed to them in this guidance.