|
Globally the implementation of International Financial Reporting Standards (IFRS) has been complex and challenging. Old concepts have had to be rethought and previous ways of achieving simple goals have changed. The possibility of unintended consequences has become rife.
Among these has been the issue of the payment of dividends. Rules that previously ensured the prudent payment of dividends now bar such payments. In the UK, for example, companies have run into particular problems. Companies with pension deficits that must be funded for years ahead are running into difficulties under Companies Act rules, which force these liabilities to be treated as a realised loss when it comes to calculating how much dividend can be distributed. Under the old reporting rules there was an exemption that allowed subsidiaries, which are often private companies, not to account for their share of the deficit in their own financial statements. Under IFRS this is no longer possible.
Another problem is where companies deal with pre-acquisition dividends. In the past such dividends were taken to be income and treated as realised and so available for distribution. Under IFRS, dividends taken out of pre-acquisition profits are not taken to be income. So under the rules there is no profit for the acquiring company and so nothing that could be considered as distributable under company law.
Where this sort of confusion has arisen elsewhere around the world it has been sorted out by a form of solvency test, as has been introduced in New Zealand through company law. Suggestions of similar changes have been voiced in the UK. But in the UK the issue has been further complicated by the habit of taking European Union (EU) company law rules and adding further regulatory bells and whistles to them. Under the EU second company law directive of 1980, which implemented rules on dividends and their distribution, the rules applied only to public companies. The UK extended the rules by "gold-plating" some of the rules on dividends so that they applied to all companies. Hence, private companies have now been sucked into the unintended consequences of IFRS which, in theory, do not apply to them.
The EU has recognised that the second directive should be revisited. Its own "high level group of company law experts" has recommended change. And to that end the EU has put a project on the reform of the capital maintenance rules out to tender. This will all take time. Even if the process works at its fastest it will be years before any changes come into force.
The central issue is to try to find a way that would enable directors to pay a sensible dividend while protecting both creditors' rights and the long-term strategy of the company.
What is required is a different approach that could cut through much of the difficulties involved.
The business law committee of the Institute of Chartered Accountants of Scotland (ICAS) is supporting a plan being put together by Isobel Sharp, the current ICAS junior-vice president and accounting technical partner at Deloitte.
"These are unnecessary burdens on private companies which inhibit their ability to pay dividends to their shareholders, and the proposals we are putting forward would also bring significant benefits to many publicly quoted groups because their subsidiary companies are usually incorporated as private companies," she says.
ICAS and Ms Sharp recognise the efforts being made around the world to solve the problem through a solvency test and that the EU is working on a solution, but they argue that these efforts will all take many years to come to fruition. Both the long-standing difficulties of the second directive and now the side-effects of IFRS are bringing the current system to a halt. "ICAS accepts that the present system has reached the end of the road," says Ms Sharp. "IFRS has been the final straw. We are coming to the crunch at the moment. The EU test is not the most sensible of things ... It doesn't focus on cash and the ability to pay a dividend and your ability to meet your obligations in the future. "
What ICAS and Deloitte are proposing is that the UK government uses the forthcoming company law reform bill to bring about change. The overall bill is expected to be one of the largest pieces of legislation ever to go through parliament, but it is expected to be possible to implement the resulting act by October 2007.
Under the legislation, the government is expected to introduce directors' duties into UK statute law. Directors will, for example, have a duty to promote the success of the company for the benefit of its members. This means that directors will have formally to take into account the likely consequence of any decision in both the long and the short term as well as the need to take regard of the interests of employees, suppliers and customers and, sometimes, the creditors.
"The company law reform bill has directors' duties there for the first time," says Ms Sharp.
"We should use them. It dawned on us that it would be better for directors to use them in dealing with dividends. They should consider the decision. They should minute how they approach their duties. It would be more sensible for directors to consider their duties under this part of the legislation in determining whether to pay a dividend as opposed to the present system which is based on a piece of arithmetic carried out at a point in time without regard explicitly to events after that date," she adds.
This would also bring the decision on payment of dividends closer to a principle-based process. "It is a system which would work," says Ms Sharp, "rather than the current system which has reached breaking point."
nder syndication arrangement
with FE
|