ACT concern over group profits advice

The ACT fears that the proposals will be open to interpretation by different accounting bodies resulting in uncertainty for UK corporates as to whether the profits from some transactions can be realised or not.

‘Our members may find in future that perfectly reasonable arrangements for financing group companies may fall foul of guidance to be issued shortly by the ICAEW on whether upstreamed dividends quality as distributable profits,’ said the ACT in a recent guidance note to treasurers.

The ICAEW first made proposals in 1999 on the determination of realised and distributable profits under the Companies Act 1985 to prevent the practice of ’round tripping’ where a corporate pays a dividend up, realises the profit and then finances it down again. A second draft was published in August 2000 after consultation with interested parties and a third draft came out in April.

The ACT’s technical officer primary concern is with the proposed definition of distributable reserves in group transactions where a subsidiary pays up a dividend but also receives additional funding from the parent at some stage.

According to ACT technical officer Caroline Bradley, if a company has a growing subsidiary, it should be able to crystalise profits – i.e. take out dividends and put financing back in at a later stage. However, ‘the proposals were extremely vague as to whether any particular transaction would qualify or would be deemed linked,’ she said.

The ACT believes the latest guidance from the ICAEW is clearer, but that the fundamental problem remains: ‘Treasurers will still be unable to plan group transactions with a reasonable level of confidence as to whether transactions are (or may be deemed) linked, how long a gap is sufficient between different stages of a linked transaction and whether intra-group loans are expected to be repaid.’

Therefore, the fear remains that different accounting bodies will interpret the guidance in different ways and this will provide an additional source of uncertainty for UK corporates, said the ACT: ‘We hope that the guidance will only go forward once it has widespread support.’

Desmond Wright, a business lawyer at the ICAEW, said a great amount of attention had been paid toward clarifying the proposals and that everything possible had been done to allay the fears of accounting bodies and corporates. As such, the ICAEW is confident that when the final guidance is released mid-November it should satisfy those parties concerned.


ICAEW online

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