ICAEW guidance on realised and distributable profits – amendments proposed
The Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland has published an update to Tech 02/10, their guidance on realised and distributable profits under the Companies Act 2006.
The update is in the form of a mark up to Tech 02/10. The deadline for comments is 9 June 2016 but the following aspects, being matters of interpretation, are stated to have immediate effect.
- Additional guidance is given on the definition of a distribution as set out in Section 829 CA 2006. The guidance emphasises that the purpose and substance of a transaction is key rather than the label that is given a particular transaction. In particular, an undervalue transaction with a shareholder or sister company is capable of being a distribution, because it involves, in substance, an element of gift to the transferee. The state of mind of the Parties may be relevant.
- There is a new section on intra-group loans on off market terms. This has been added to take account of the change in accounting treatment of interest free intra-group loans and other intra-group loans not at a market rate of interest (unless they are repayable on demand) following the adoption of FRS 102. In accordance with FRS 102 (and IFRS) these loans are recognised initially at fair value rather than face value. The guidance sets out the accounting treatment for an interest free loan from parent to subsidiary, subsidiary to parent and subsidiary to fellow subsidiary.
- Although the definition of a distribution refers to distributions of assets, a distribution can arise from an assumption of a liability if the company does not receive consideration of the same amount. This is because the liability commits the company to transfer assets at a future date and its assets are therefore reduced when entering into the commitment.
- The guidance now confirms that a distribution that arises from the discharge of a liability for a liquidated sum (such as a waiver of an amount due from a parent) is not a distribution in kind and so not within the scope of Sections 845 and 846 CA 2006. This is because the discharge of a liability for a liquidated sum falls outside the definition of "non-cash" asset in Section 1163(2) CA 2006.
- Additional guidance on the determination of the amount of a distribution in kind. In determining whether a company has profits available for distribution after any adjustment in accordance with Section 845(3) CA 2006, it is concluded that there must always be a positive balance of profits available for distribution, however small, immediately before the transfer of the asset and the balance cannot be nil. The guidance now notes 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.
Other changes to the guidance:
- In a situation where an asset is sold partly for qualifying consideration and partly for other consideration (for example a mixture of cash and real property) any liabilities should first be deducted from the amount of qualifying consideration received.
- The guidance on retirement benefit schemes has been rewritten as the previous material was mainly concerned with transition from SSAP 24 to FRS 17.
- New paragraphs draw attention to the considerable doubt concerning the operation of the special rule in Section 843 CA 2006 for long term insurance business in light of the new Solvency II regulatory regime. This will affect accounts for years ending on or after 1 January 2016. The ICAEW understands that the Government is actively considering changing the law to address this issue.
- Further guidance on deferred tax. A deferred tax credit which results in the recognition of a deferred tax asset (rather than a reversal of a realised loss) will generally be an unrealised profit because a deferred tax asset does not usually meet the definition of qualifying consideration.
The exposure draft can be found here.