ICAEW guidance highlights when intragroup loans can be distributions
The Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland have published updated guidance on realised and distributable profits under the Companies Act 2006 (Tech 02/17). This is based on the guidance previously issued as Tech 02/10 but has been revised following comments on the version on which the Institutes consulted in March 2016.
Tech 02/17 includes:
- additional guidance on the definition of distribution with extensive references to recent case law. The guidance stresses that the purpose and the substance of a transaction are key, rather than the label put on a transaction. The state of mind of those orchestrating the transaction may also be relevant but the key point is not whether they intended to effect a distribution or knew that it was a distribution at law, but whether the intended substance of the transaction was a distribution;
- guidance on the consequences of accounting for intra-group loans on off-market terms in accordance with FRS 102 and the extent this gives rise to a distribution for accounting purposes or as a matter of law. Off-market for these purposes means interest free or not at a market rate of interest, unless the loan is repayable on demand. The guidance analyses interest-free loans from parent to subsidiary, subsidiary to parent and subsidiary to fellow subsidiary, as well as loans above market rate and loans repayable on demand. The guidance is also relevant to loans made to or from shareholders;
- a list of intra-group transactions other than loans that may involve a distribution, such as undervalue received for an asset transferred to a parent or fellow subsidiary, overpayment for services received from a parent or fellow subsidiary, guaranteeing the debt of a parent or fellow subsidiary without receiving a fee, and the acquisition or surrender of tax losses for a non-arm’s length sum;
- additional guidance on distributions in kind. The guidance confirms that:
- the transfer of an asset can be a distribution as a matter of law even if it has no accounting impact, for example an asset that was not recognised in the balance sheet transferred for no consideration
- a distribution which arises from the discharge of a liability for a liquidated sum is not a non-cash asset within the scope of Sections 845 and 846 Companies Act 2006
- a transfer of assets may be lawful in accordance with Section 845 but may be an unlawful distribution of capital contrary to common law, for example where the book value of an asset increases because of additional expenditure after the date of the relevant accounts but before the asset is transferred without a commensurate increase in consideration, such that the company would be left with a deficit of distributable profits after the transfer.
- guidance on the consequences of the changes in the law concerning distributable profits in relation to long-term insurance business made by The Companies Act 2006 (Distribution of Insurance Companies) Regulations 2016.
Tech 02/17 also states that the Institutes consider, based on legal advice, that there is no requirement under law or accounting standards for financial statements to distinguish between realised and unrealised profits or between distributable profits and non-distributable profits. However, the Institutes suggest that listed companies may wish to consider how to address the calls for greater transparency from the investor community.
Tech 02/17 reflects accounting standards in issue as at 31 December 2016.