Dividends in specie

Dividends in specie

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I'm dealing with a company which is being liquidated in 2014.

In 2013 (year end), the company had a substantial portfolio in quoted investments, and these were transferred (at 2013 year end) from the company’s name into the sole shareholder’s name,

Presumably, this should be treated as a dividend in specie, but how do I show this in the company’s accounts?

Do I need to show a profit or loss on disposal, or can I just:

Cr Investments (cost)

Cr Profit on disposal

Dr Dividends (market value)

Thanks in advance.

Replies (17)

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By User deleted
02nd Jul 2014 20:28

I'm going to write the full answer here; however, you could choose to follow what is appropriate according to your circumstances:

1. Whilst S.830 CA/06 says that distribution could only be made out of 'realised profits',  s.846 does permit distributions in kind.

2. IFRIC 17 says that the dividends should be at the fair value of net assets

So, first of all the shareholders should pass appropriate resolutions authorising the sale of the assets to the owners, including the sum involved, and the level of distribution. If the dividend becomes due and payable immediately, accounting entries should be passed in the books on the date of the resolution as follows:

a) Entry for the sale

   Dr Shareholders a/c

   Cr Profit on Sale - STRGGLE item

   Cr The cost of the investment

 

b) Entry for the distribution

   Dr Equity Dividends

   Cr Shareholders a/c

 

 

 

 

 

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By johngroganjga
02nd Jul 2014 21:30

I will give a simpler and shorter answer. Yes I believe your entry records the transaction you describe correctly.

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By Steve Kesby
02nd Jul 2014 23:53

I disagree...

... with both responses.

CA 2006 s. 845 requires the distribution to be made at carrying value, otherwise you get the ridiculous situation where you haven't got sufficient distributable reserves to actually distribute the asset until you've actually distributed the asset and realised the profit on it.

IFRIC 17's a nonsense from a UK company law perspective for that very reason and so, unless you need to apply IFRS, can safely be ignored.

That means the entries are simply:

Dr. Dividends (book value of investments)

Cr. Investments (book value)

There's no sale to be recognised, you're just distributing the assets.

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By User deleted
03rd Jul 2014 07:46

@Steve
IFRS is not a nonsense from a CA/ 2006 perspective, s. 395 does accept both IFRS and UK GAAP frameworks for preparation of accountsEven under FRSSE these investments are either marked to market or the market value must be disclosed in the accounts. If marked to market, unrealized value may have already been recognized in the accounts. In fact, where the market value is less than the book value it makes all the more sense to transfer it at market value!The directors have the power to decide which way to go so there is nothing cast in iron that the transfer has to be at book value.And for tax purposes this treatment ties in with s.1020, CTA/10

Yes there is no sale: it is a transfer and that's what I meant

 

 

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By User deleted
03rd Jul 2014 08:26

Presumably, therefore ...

... distributable reserves need to reflect the profit on disposal (assuming that MV > carrying value). It's a rather circular point, but if they don't then you end up with the absurd situation that Steve has identified, in that it may not be possible to distribute an asset - because the distributable reserves cannot be established until the asset has been distributed.

But, to play Devil's Advocate - what if the company's sole asset was property that cost £500k, with distributable reserves to match that. But, last year it was revalued to £800k with a £300k revaluation reserve. AFAIK, revaluation reserves are not distributable to in that case it would not be possible to distribute the asset even at its carrying value.

Or is my lack of accountimng knowledge letting me down again?

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By User deleted
03rd Jul 2014 08:53

@BKD

revaluation reserves are not distributable to in that case it would not be possible to distribute the asset even at its carrying value

S.846 has solved this problem for you!

 

 

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By johngroganjga
03rd Jul 2014 09:08

But a revaluation reserve becomes a realised profit at the moment that the asset is distributed, so there is no nonsense or absurdity in the idea that a dividend in specie needs to be accounted for at market value.  That doesn't mean it has to be (which is a separate matter) - just that the reasons given above for it being an illogical absurdity to do so, are themselves illogical and absurd. 

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By User deleted
03rd Jul 2014 09:13

Thanks, taxguru

That is very helpful

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By johngroganjga
03rd Jul 2014 09:21

My understanding that a

My understanding that a dividend in specie would have to be accounted for at market value was based on my understanding that any transfer of chargeable assets from a company to a shareholder would be deemed for tax purposes to be at market value.  Are we now being told that a dividend in specie is an exception to that general rule?  Or is my understanding of the general rule itself not right?

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By Steve Kesby
03rd Jul 2014 09:58

@ John

You're correct abou the tax treatment, but should the accounting treatment be governed by the tax treatment? Or should we do what the Companies Act tells us to do?

Incidentally, there isn't any realisation of profit when you distribute an asset. You can't realise a profit or loss by giving the asset in question to somebody for no consideration. The effect of giving the asset away for no consideration to a member is that you've distributed that part of your reserves that were represented by the asset.

Taxguru's FRSSE based arguments don't change anything. If the investments are marked to market then that's their carrying value and the amount they should be distributed at. If the carrying value exceeds market value, then they should be impaired if they're not marked to market.

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By johngroganjga
03rd Jul 2014 09:57

Yes I accept that the accounting treatment and the tax treatment don't have to be the same.

But for example if my company pays me a dividend in specie comprising a freehold property in its books at £500 (purchase price in 1926), which it is common ground is now worth £500,000, how much dividend income do I pay tax on?

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By Steve Kesby
03rd Jul 2014 10:06

Well two points

Yes, if the company's carrying the asset at £500 and it's worth £500K, then CA 2006, s. 845 says the amount of the distribution is £500, but the taxable distribution is £500K. What's the problem with that?

If you want it all to look nice and neat, revalue before you make the distribution.

I've no idea why the company wouldn't have revalued at some point in those circumstances and s. 846 steps in to deal with the problem that there might not be sufficient distributable reserves in those circumstances.

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By johngroganjga
03rd Jul 2014 10:12

Well let's assume it hasn't revalued - no requirement to depart from historical cost after all.

And in those circumstances the company is taxed on a capital gain as if it had sold the property for £500,000?

And the shareholder acquires at the same CGT base cost?

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By Steve Kesby
03rd Jul 2014 10:15

Yes John...

... those are the TAX consequences. If you want the accounting and tax consequences to be the same, revalue prior to the distribution.

S. 845 is perfectly clear that the amount of the dividend is the carrying value of the asset.

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Replying to atleastisoundknowledgable...:
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By User deleted
03rd Jul 2014 10:59

But s.845 applies only where at the time of the distribution the company has profits available for distribution, and.......

So if there is no profit available for distribution the directors have to go for the market value.

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By Steve Kesby
03rd Jul 2014 10:23

Another example

Let's say our company hassurplus trading stock which cost £20K. It's weapons grade Uranium and you can get a very good price from the North Koreans (probably £500K), but we're a scrupulous company.

One of our shareholders is altogether less scrupulous, he'll quite happily sell it to Kim Jong-Un et al, so we distribute our weapons grade Uranium to him.

In relation to that distribution of stock, what's our accounting profit? and what's the tax treatment?

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By jonathanw
03rd Jul 2014 10:42

Don't intend to interrupt the current discussion...

... but just want to say thanks to everyone for your help!

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