FRS 102 and guidance on realised and distributable profits

05 May 2016

The ICAEW and ICAS have published suggested changes to their guidance on realised and distributable profits under the Companies Act 2006. The changes are largely designed to reflect changes to UK accounting standards, in particular FRS102, and do not raise any fundamentally new principles in relation to realised and distributable profits. However, the opportunity has been taken to address certain issues arising.

‎Although comments are sought on the draft guidance, the draft says that the guidance on the interpretation of law, in particular the guidance on the definition of a distribution and its application to intragroup loans on off-market terms, should be regarded as having immediate effect.

The main changes include:

  • Additional guidance has been added around the definition of a distribution. This has been applied to intragroup loans and further guidance addresses the consequences of accounting for intragroup off-market loans. In accordance with FRS 102 (and IFRSs) these are recognised initially at fair value rather than face value (see Business Edge June 2014). The guidance in paragraphs 9.45-9.56 addresses the nature of the difference in value and subsequent interest income and expense under the law and for distributable profits.
  • The guidance on retirement benefit schemes has been completely rewritten on a simplified basis. 
  • The guidance on deferred tax has been reorganised. It has been clarified that, unless it is the reversal of a realised loss, a deferred tax credit which results in the recognition of a deferred tax asset will generally be an unrealised profit because a deferred tax asset does not usually meet the definition of qualifying consideration.

Read the purposed changes in Tech 05/16 BL. Comments are requested by 9 June 2016.