Accounting for capital loss and dividends
I am hoping someone can help me with the following query:
There are two companies, A and B. Both are owned 100% by the same director/ shareholder. Company B then buys the shares in Company A at an arms length valuation of £20,000. Six months later Company A ceases to trade and is effectively worthless.
We are drawing up the first year's accounts for Company B. It has accounted for the share purchase as Debit Fixed Asset Investment £20,000, Credit Other Creditors £20,000. Then, it recognises the loss and enters: Dr Loss on Investment (P&L) £20,000, Cr. Fixed Asset Investment £20,000.
If you ignore the above, and tax, the company has otherwise made a profit of £50,000 and the director/ shareholder has extracted £40,000 as a dividend. BUT...once you take into account the loss on the shares the reserves are "only" £30,000 so the dividends are illegal.
The question is...is there a way in the accounts to treat the £20,000 as a capital loss separate to the distributable reserves so the dividends are not illegal? Adding the loss back in the tax computation and showing it as a capital loss is great for the tax return but doesn't help with the accounts! I could show it as an exceptional item, but IRIS seems to automatically take it out of distributable reserves anyway so I am back to square one.
Is there a way for IRIS to somehow show it "below the line" so the dividends do not look illegal? Or can - or should - the £20,000 be shown as a capital distribution somehow ? Or should I call the £20,000 a "negative capital reserve" on the balance sheet, which sounds and is ridiculous as far as I can see!
I would appreciate any help with this.