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The effect of the adoption of IFRSs 9 and 15 on distributable profits

13 November 2017

Companies may find that the adoption of IFRS 9 Financial Instruments or IFRS 15 Revenue from Contracts with Customers for periods beginning on or after 1 January 2018 may have an effect on the level of profits they have available for distribution sooner than they anticipated.


What is the problem?

Realised profits are calculated by reference to relevant accounts that reflect the accounting standards that are applicable to the period for which they are prepared.  However, for distributions made in the period in which a new or revised standard is to be adopted, the application of the common law capital maintenance rules require that any new accounting standards should be taken into consideration from the first day of the accounting period in which they are to be adopted. 

For an IFRS or FRS 101 adopting company with a 31 December year-end, for example, the adoption of IFRS 9 and IFRS 15 will be relevant to the determination of the expected level of profits available for distribution from 1 January 2018, assuming those standards are not adopted prior to their mandatory effective date.

Directors must, therefore, take particular care over the transitional effects of adopting these new accounting standards when deciding on the timing and value of any dividends they pay or declare between the first day of the first accounting period in which these new standards are adopted and the publication of the first set of financial statements prepared in compliance with them.


Effective date of IFRS 9 and 15 GAAP for distributions

Last “old” IAS 11, 18 and 39 financial statements

31 Dec  2017

31 Mar  2018

30 Jun 2018

30 Sep 2018

IFRS 9 and 15 affect final dividends declared/ interim dividends paid on or after…

1 Jan 2018

1 Apr 2018

1 Jul 2018

1 Oct 2018


What is the effect?

There are many ways in which the adoption of IFRS 9 or IFRS 15 may lead to the recognition of transitional adjustments that remove assets or introduce liabilities into the balance sheet, which will have the consequent effect of reducing profits available for distribution. For example, a company might find the recognition of contract costs are accelerated under IFRS 15 or the recognition of revenue is deferred.

It may also find that the costs of financial liability modifications are accelerated under IFRS 9 or the impairment of trade receivables, or other financial assets carried at amortised cost, is increased due to the adoption of the expected loss model. Importantly, it is our experience that the full nature and extent of the effect of adopting these complex new standards does not become clear until a robust implementation exercise has been carried out. Paying a dividend without understanding the full implications of adopting these new standards will increase the risk of it subsequently being determined to be illegal.


What can you do?

If a company wishes to make use of the reserves that will (or may) be consumed by transitional adjustments, it will need to pay an interim dividend (or declare a final dividend) before the first day of the first accounting period in which the company adopts the new requirements. Note, however, that where this approach is taken, directors must still consider whether any losses have arisen under the old IFRS requirements since the date of the company’s last ‘relevant accounts’ on which the dividend has been based (often the last set of annual accounts prepared), as well as their other fiduciary duties, before paying the dividend.

Where a company elects instead to pay an interim dividend (or declare a final dividend) after the first day of the first accounting period in which it adopts IFRS 9 and 15, directors would be well advised to prepare a new set of accounts that include the effects of transition to those new standards in order to inform their judgement regarding the profits a company has available for distribution.

Similar considerations will apply for the adoption of IFRS 16 Leases, which is mandatory for periods beginning on or after 1 January 2019.

For help and advice on the determination of realised profits in the context of distributions contact Richard Matthews.


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