UK GAAP is changing. For accounting periods commencing on or after 1 January 2015, companies preparing individual company accounts under UK GAAP (which remains common for listed companies and their subsidiaries, even where their consolidated accounts are prepared under IFRS as required by the Listing Rules and the AIM Rules) will be reporting under brand new accounting standards (New UK GAAP).
The new accounting standards move significantly closer to IFRS in many respects, and it is anticipated that this transition will result in “line item” differences, which may, in some cases, be very material.
Whilst the first sets of annual accounts prepared under New UK GAAP won’t hit doormats before Spring 2016, the introduction of New UK GAAP can have consequences well in advance of next year’s reporting season. Most significantly, a company’s distributable profits position will need to be assessed by reference to New UK GAAP when they are in their first reporting period under the new regime.
The rules on dividends and distributions
When the directors of a UK company are considering a dividend or other corporate action requiring consideration of the company’s distributable profits position (such as a share buy-back), two legal requirements need to be borne in mind: (i) the statutory rules on distributions under the Companies Act 2006 (the Statutory Rules); and (ii) the common law restrictions on distributions of capital (the Common Law Rules).
Whilst directors can, under the Statutory Rules, rely on the last set of annual accounts to justify a distribution (even if prepared under a different framework) if they show sufficient distributable profits, the Common Law Rules look at the “real time” reserves position – and that is one of the reasons why directors need to look at post-balance sheet events when assessing the lawfulness of a dividend, share buy-back or other distribution.
The assessment of distributable profits under the Common Law Rules (and the preparation of any interim accounts needed to justify the distribution under the Statutory Rules if the last set of annual accounts do not show adequate distributable reserves) must be made under the then-prevailing financial reporting framework.
So, for a company reporting under New UK GAAP and having a 31 March 2015 year end, the directors will need to understand the impact of New UK GAAP on its distributable profits when looking at any dividend, share buy-back or other distribution accounted for in the period commencing 1 April 2015. As we note above, these accounting changes will affect individual line items in the accounts and may mean that existing distributable profits are eroded or eliminated entirely under New UK GAAP.
The accounting rules in this area can be complex, with ICAEW Technical paper 02/10 setting out further detailed guidance (from paragraph 3.28 onwards). Practically speaking, you will need to speak to your advisers (and in particular your auditors) to cover this point off whenever a distribution is proposed and will be accounted for during a period when New UK GAAP will apply.
Restructuring the balance sheet?
Listed companies may need to consider restructuring their balance sheet (usually by undertaking a court-approved reduction of capital to create distributable reserves) to support their current dividend policies and share buy-back programmes. Restructuring may also be necessary at subsidiary level (where an expedited “out of court” route is available for private limited companies) to eliminate dividend blocks created by New UK GAAP. Osborne Clarke has extensive experience on advising on all types of reductions of capital – please speak to your usual OC corporate contact or any of the contacts set out below.