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Should we disclose directors dividends?

Should we disclose directors dividends?

Now that we no longer need to disclose directors shareholdings has it become necessary to disclose dividends paid to directors as part of the 'transactions with directors' disclosure?

This question applies to ordinary and preference share dividends.

Thoughts on this would be much appreciated
Stormrider

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By Anonymous
17th Oct 2008 23:32

From the director's point of view
Accounts are prepared for two main reasons:

1. Statutorial requirement;
2. Financial planning.

Most directors would rather pay their accountants to advise them, not third parties that may or may not want the information!

If an approach is made for formal finance any additional information required would be provided.

These sort of disclosures are a pain in the proverbials for accountants as they are not on the whole system generated, and if they are not required then b*ll***s to them!

Essex Man, I think one thing hmrc is capable of is comparing the directors tax return to the accounts and I hardly think they would open a full enquiry, just an aspect one, if they did want more information.

Lisa, I would only do a tax return if there is tax to pay. That leads on to the position that to calculate that you may as well do a tax return, in the circumstance you describe it wouldn't take more than 10 minutes with a reasonable bit of software.

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By Anonymous
17th Oct 2008 17:59

Directors have to submit tax returns???

Unless Revenue practice has changed recently, I have a handful of directors that I act for whose earnings are below the Higher Rate tax band and who no longer receive tax returns. As their income does not generate any tax liability, HMRC has written to them saying that "We have looked at your last Tax Return and do not propose to send you returns in the future. However, if there there have been any changes in your financial circumstances since the infomation given in that return, or they change in the future, you must let us know straight away."

Do they really have to submit tax returns???


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By Anonymous
17th Oct 2008 17:37

Means problem?
I'm sorry, but I can't agree that taking a low salary and high dividends might leave the inspector wondering about means for the director living in his posh house.

The directors have to file personal tax returns, and the dividends will be included in the total income returned on each form.

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By Anonymous
17th Oct 2008 17:23

Essex Man…..
……you have taken the words right out of my mouth.

I do agree with all who have posted so far that there is no legal requirement to disclose the dividends paid to directors but the users of financial statements such as the taxman, Fleet street journalists (Rich list), small businessman like me etc want this information to be disclosed regardless of what the law says.

But judging by the comments posted so far, it seems to me that everybody is saying to us:

”We don’t have to disclose that information anymore Jack and we can quote you Chapter and Verse that allows us not to. We don’t give a Monkeys about the users of financial statements. If you need that kind of information, go and get it yourself!!

I will repeat what I have said before, only slighly differently, that it is incumbent upon the directors of the company with assistance from their accountants (the hired hands) to provide this information! This is not too much to ask, is it? You have been doing this for years, why stop now. Continue the good work!


Charlie Wong
Garrett & Co

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17th Oct 2008 16:56

abbreviated accounts disclosure
I am a bit concerned about the statement that dividends credited to directors loan accounts are disclosable. Given that 90% of accounts filed are abbreviated, the dividends are not disclosed anywhere, but I thought transactions with directors had to be shown in abb accts. Any thoughts? I don't want to call my professional body yet. Does crediting to laon acct make a difference according to the state of the loan acct at the date of credit ie overdrawn or in credit or zero?

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By Anonymous
17th Oct 2008 14:24

You're Quite Right...
...to say that HMRC can ask about the dividends if they want to know. But does the company actually want to incur the cost of them doing that?

Suppose your company is going down the route of paying a small salary and large dividends. If the dividends aren't disclosed then, as it appears from outside, the shareholder-directors (living, say, in a large house in the expensive part of town) have a means problem!

You may as well put a large note on the accounts: "HMRC - please take this company up for enquiry".

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By Anonymous
16th Oct 2008 12:05

yes you should disclose them!

I do care how much the directors of the companies I do business with pay themselves. For you as accountants, it’s easy to work this out but I am not a bean-counter and I have better things to do with my time than do a company search at CH to found out who owns how much in the companies I do business with.

If a company makes a huge profit and pays it all out as dividends and leave the company without any working capital, I don’t want to do business with it. I need to know whether the dividends have been paid to the director or someone else. That way I know who to sue if I have suffered a loss as a result of such stupid conduct.

Yes, I do need to be spoon fed. It’s my right to have this information. What do you want to hide it for?

As Sarah said, you are required to disclose this information by FRSSE (effective 2008) par 15.1 if material even though there is no legislation to say that it should be specifically disclosed as a Transaction with Director(s). It is therefore incumbent upon you accountants to comply with this requirement and give us the information.

I rest my case.

Charlie Wong
Garrett & Co

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By Anonymous
16th Oct 2008 17:06

The point is...
...no one is hiding anything - I'm just sick of dumbing down.

Dividends are distributions of profits to shareholders.

If they are also directors that will show on the annual return.

How are you going to get a set of accounts without doing a search? why not get the annual return at the same time?

All business is maths, make the figure coming in greater than the one going out. How else do you formulate pricing policies, work out margins, calculate stock requirements, work out marginal costs etc. to enable your business to make a profit? A simple division is a piece of cake compared to that.

At the end of the day the directors are controlled by the shareholders, if the company strips all profits by dividend that is up to them and on its own should not preclude trading with a company.

If an owner managed company chooses that course it is not irresponsible per se. Without knowing their tax planning/wealth maximisation model that is a sweeping assumption. For all you know the owners may be (and probably are) getting better rates of investment returns outside the company. That doesn't mean the money is lost to the company and wont be injected back in if needed does it?

What if it is a one man band company with no working capital requirement, why keep cash in the company?

If the company has sufficient reserves to cover a dividend when paid then I think your proposed action against the company would fail.

The fact is, no one should be relying on filed accounts alone when making a decision to trade with a company, at best they are going to be 3-4 months old (could be 21 months old), far better to do a full credit check, to include any judgements or actions against the company. Trade and bank references are also useful (even if permission not granted!).

A dividend credited to directors loan account is a different situation as it is in fact two separate things: 1. A dividend paid to a shareholder and 2. A loan from a director. We just "cut corners" by posting a single debit and credit, but that doesn't negate the substance of the thing, that is a receipt of finance from a related party (frsse 15.1(c)) and therefore should be disclosed. I see nothing in FRSSE 15.1 to change my opinion that dividends to shareholders, who happen to be directors, do not need to be disclosed.

Finally, it is not encumbent on "us accountants" to provide this information, it is incumbent upon the directors of the company! We are just the hired hands!!

See you at my disciplinary hearing!

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16th Oct 2008 12:50

Finally
an answer from our professional body advice helpline. They say there is no requirement in the standards to seperateley disclose dividends [explicitly dividends] as a transaction with director as they are an appropriation of profit. They also said that a company might choose to disclose them as a transaction with the director to follow uk gaap but they said there is nothing in the acts or standards to specify they must do so there would be no issues if the company chooses not to disclose them as such. They did say that a directors loan account where dividend credited to must be disclosed as transaction with the director.

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By Anonymous
16th Oct 2008 11:04

As I said
Dividends are shown in the reserves note

Shareholders and holdings are on public record

Divided one by the other and Bob's your uncle

Do we really need spoon feeding? I am sick of the "nanny" state, at least this is a step in the right direction.

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16th Oct 2008 09:06

To sarah
I'm not sure I would classify a dividend as a transfer of an asset but i would agree they are more a distribution of profit as OGA states. However I would not disagree absolutely given Steven Collings comments that the dividends could well be caught under FRS 8 or something similar. His article just states that dividends are disclosed in the notes. As dividends are surely more common than a quasi loan i would have thought the accounting standard to be more specific.

Who knows!!!

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16th Oct 2008 07:58

para 15.1 FRSSE
Ayesha

If a dividend is not a transfer of an asset to a shareholder in the form of cash, what is it? The wording is clearly there to capture all director/related party transcations that are material. If the transfer of cash to a director is not a transfer of an asset, then why the need to exempt remuneration in 15.7?

OGA- I agree entirely with what you say- it is a ridiculous requirement, as so many disclosure requirements can be- it is though required (in my opinion!)

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By Anonymous
15th Oct 2008 22:21

For what its worth
I'm with Ayesha

dividends are a distribution of profit, not a transaction.

I can't see any relevance to this, the spirit of the legislation, to me, is to ensure accounts are on a level playing field by letting users know that there are transactions that may be at preferential rates; or that although net assets may look weak, there are creditors that are effectively long term; etc.

It just to give a users a better picture - what happens to profits after they have been taxed is not relevant. If the company is operating a policy of stripping all profits as dividends this will be apparent.

Bear in mind the majority of companies this applies to are close companies so it is pretty bloody[***] obvious where the dividends are going (and why!)

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15th Oct 2008 22:14

Don't agree
I don't necessarily agree with sarah michaels interpretation. I looked at that paragraph because ive been following the thread but 15.1 is about goods/services/assets/liabilities or provision of finance where dividends aren't any of these. my view is that as div idends are still disclosed in the notes , which is what the FRSSE requires then the disclosure has been made. The original question was should it be disclosed as a transaction with director but as has already been pointed out in the thread below transactions with directors are only about loans and credits etc not dividends.

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15th Oct 2008 21:51

Yes
To me it is quite clear that directors dividends need to to be disclosed in the accounts, if material.

According to FRSSE and FRS 8, directors are related parties.

Material transactions between the entity and related parties need to be disclosed.

Therefore if the dividend paid to individual directors are material, you need to state how much is paid to each director.

The only exemption for director transcations is for remuneration. Dividends are not remuneration.

Note this requirement is not derived from legislation but from accounting standards.

FRSSE paras 15.1 and 15.7

FRS 8 says pretty much the same.

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15th Oct 2008 20:26

.
I think old greying accountant has a valid question because companies house seem to accept anything thrown together from people who do not even know what a balance sheet is -and i'm not getting into the qualified v unqualified argument here I'm getting into declining standards at companies house.
What i do know is that the Financial Reporting Panel have started to review accounts filed at Companies house and have been known to write to company directors whose accounts are not done correctly threatening to prosecute them if they do not abide by the legislation/accounting standard disclosure requirements as this happened to a new client of ours who changed accountants as a result and sued the old accountant because of this so it seems big brother does look but big big brother!

Best to be safe than sorry I think.

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By Anonymous
15th Oct 2008 20:05

But as I say
who (hmrc apart) gives a stuff. (- and they can ask the questions they want anyway.)

What the company does with its profit is up to the company.

Anyone lending to a private company would look at EBIT, what comes after is of no concern other than to make them put covenents on their funding to maintain a certain level of capitalisation if they think the dividend policy OTT. They would undoubtably ask any pertinent question of ownership, as part of ML procedures if nothing else in any case.

Marie: yes I am sure, how else will your reserves note balance?

From the article:

"Dividends

Dividends paid to shareholders are no longer shown on the face of the profit and loss account. Dividends paid are shown in the notes to the financial statements as a reconciling item under the ‘Reserves’ note which reconciles the opening and closing balances shown in the company’s profit and loss reserves."

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15th Oct 2008 17:54

Thankyou also Steven
I wondered myself about why they did away with the directors interests disclosure. We thought it was an error in our software package at first!
Reading this thread I was beginning to worry that all the accounts we were sending out with dividends to director/shareholders in were wrong but thankfully not.

Thankyou.

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By kabini
15th Oct 2008 15:59

Steven
Thank you for a clear and prompt reply to my queries. I was about to dial 999 to see if they could track you down. Your comments are very helpful indeed.

Sounds like the government didn’t conduct any consultation before the changes were implemented. I could be wrong but I don’t remember seeing one. It won’t surprise me if next year, without consultation, the requirement to disclose the company’s principal activity and the name(s) of the director(s) in the Director's report is lifted. If things continue this way, I am beginning to wonder what the point of the Director’s Report is for small companies.


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15th Oct 2008 14:12

Did I hear my name?!!
Hi,

In answer to the original poster's query, the FRSSE does not actually specifically mention disclosure of dividends as a "Transaction with Director" under the related party provisions, and whilst the ownership of shares by the directors is not disclosable from 6 April 2007, they could be caught under the provisions of FRS 8 "Related Parties" (or FRSSE equivalent) perhaps. I say "perhaps" because GAAP states (to quote) "Now that such interests no longer require disclosure, the argument that transactions with shareholders who are directors must be specifically disclosed gains much weight".

This suggests that it is still an "argument" and there is not actual legislation to say that it should be specifically disclosed as a "Transaction with Director(s)". However, dividends are still disclosed in the notes, rather than on the face of the profit and loss account and I have not seen through research that this has ever been challenged by professional bodies or the FRRP. The FRSSE only classifies disclosable "Transactions with Directors" as loans, quasi-loans, credit transactions and guarantees - dividends are not mentioned.

With regards to Freddy Kabini. I agree that FRSSE (January 2007) does require director's interests to be disclosed. However, the issue here is not the actual content of the FRSSE and what it stipulates, but (a) the timing and (b) the requirements of the Companies Acts.

FRSSE (effective January 2007) was issued in April 2006 and early adoption was permitted. However, the requirement to disclose interests in the shares of a company by private and unlisted companies was removed on 29 March 2007 for directors' reports signed on or after 6 April 2007. Therefore, the removal of the requirements from the Companies Act came much later than when the FRSSE 2007 was issued. This is why FRSSE 2008, which cannot be adopted earlier does not contain the requirements.

In the UK, the Companies Acts prevail over FRSSE and other accounting standards, so just because FRSSE states that directors' interests should be disclosed in the director's report this is essentially redundant because the Companies Act removes this requirement and thus prevails.

The reason these requirements were lifted was because before they were repealed, the FSA required disclosure of dealings by directors of companies whose shares are traded. These rules were introduced as part of the UK's implementation of the EU Market Abuse Directive. The Government then decided that this directive need not apply to the vast majority of private companies and public companies that are not listed so they repealed the requirements but only for private companies and public companies that are not listed.

Hope that answes your queries.

Kind regards
Steve Collings

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By kabini
15th Oct 2008 12:57

the case for disclosure

Marie
Thank you for the link. It’s got all the information that I need. I also spoke to Technical support at ICAEW and they helped me locate some of the documents referred to on the SWAT website.

OGA
I agree that information about directors and shareholders is on public record but very often some of these directors hide behind trusts and offshore companies. Even if you buy the company’s Annual Return from Companies House for £1, you still won’t know whether the Trust or the offshore company is for the benefit of the director(s). In these circumstances, I think disclosure is the best policy even if legally you are not required to. Surely users of financial statements are entitled to this information. Why make it so difficult for them to get it?

Out of curiosity, why has the requirement to disclose the director’s interests been removed by Companies Act 2006? It doesn’t make sense to me.

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By Anonymous
15th Oct 2008 11:53

Public record
No idea of legal answer, but;

Directors and shareholders are on public record, dividends are disclosed on the accounts. It is not rocket science to calculate the dividend a director recieved therefore it is not logical to have to disclose this on the accounts (unlike other transactions where there is no other way of knowing).

However, when have logic and statute been happy bedfellows?

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By kabini
15th Oct 2008 11:07

What is the source?
Marie

Where are they getting this information from?

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By kabini
15th Oct 2008 10:59

Is Steve Collings’ article correct?

It says “From April 2007, director’s interests in the shares of a company no longer have to be disclosed in the directors’ report.” I think he meant April 2008.

FRSSE (effective January 2007) requires the director's interests to be disclosed.

FRSSE (effective April 2008) does not require such disclosure, but early adoption is not permitted.

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By kabini
14th Oct 2008 22:06

Overcome your disclosure problems

Good question!!

I have read and re-read an article entitled "Overcome your disclosure problems" by Steve Collings, and there is no mention of such a requirement.

I am now going through the Companies Act 2006 and will let you know if I find something. If you don't hear from me within the next day or so, assume there is no such requirement.

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