CHAPTER 18
DISTRIBUTION OF
PROFITS AND ASSETS
Connolly – International Financial Accounting and Reporting – 4th Edition
18.1 INTRODUCTION
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The principle of capital maintenance is fundamental to the protection of
creditors of limited liability companies since shareholders may deplete
the equity or capital of a company by withdrawing excessive dividends
In simple terms, an entity has maintained its capital if it has as much
capital at the end of the period as it had at the beginning of the period
Capital maintenance – the financial concept or the physical concept
The rules regarding the distribution of profits are set out in company
legislation and are unchanged by the transition to IFRS
However, the ‘relevant accounts’ referred to in company legislation are
now IFRS-based accounts
Company law accounting rules generally state that only realised
profits may be included in the SPLOCI of company legislation accounts;
IFRS, however, permits unrealised gains to be included in the SPLOCI
of IFRS accounts in certain circumstances
Regardless, the profits available for distribution comprise only realised
profits less losses
Connolly – International Financial Accounting and Reporting – 4th Edition
18.2 DISTRIBUTIONS
A distribution is defined as any distribution of a company’s
assets to members (shareholders) of the company, whether in
cash or otherwise, with the exception of:
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an issue of bonus shares;
the redemption or purchase of the company’s own shares
out of capital (including the proceeds of a new issue) or out
of unrealised profits;
the reduction of share capital by reducing the liability on
shares in respect of share capital not fully paid up and/or
paying off paid-up share capital; and
a distribution of assets to shareholders in a winding up of
the company.
Connolly – International Financial Accounting and Reporting – 4th Edition
Distributable profits
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All companies are prohibited under company legislation from paying dividends
except out of profits available for that purpose
Distributable profits consist of accumulated realised profits less accumulated
realised losses
While unrealised profits cannot be distributed, there is no difference between
realised profits from normal trading and realised capital profits (e.g. from the sale of
a non-current asset)
Interim dividends are allowed to be paid, provided they can be justified on the
basis of the latest audited financial statements
There is a further requirement for Plcs that the total of the net assets of such must
be equal to or more than the aggregate of the called-up share capital plus
undistributable reserves both at the date of, and immediately after, the distribution
Undistributable reserves of a Plc are defined as:
 the share premium account;
 the capital redemption reserve fund;
 the excess of accumulated unrealised profits, not previously capitalised, over
accumulated unrealised losses not previously written off by a reduction or
reorganisation of capital; and
 any other reserve that the company is prohibited from distributing by any
enactment, or by its Memorandum of Articles or Association.
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 18.1: Distributable profits of public and private companies
Calculate the distributable profits of both Companies A
and B assuming that each is a:
(a) private company; and
(a) public company.
A Limited
B Limited
€000 €000
€000
€000
Share capital
1,000
1,000
Unrealised profits
200
200
Unrealised losses
200 (300)
(100)
Realised profits
300
800
Realised losses
300 (200)
600
Share capital and reserves
1,500
1,500
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 18.1: Distributable profits of public and private companies
Solution
A Limited:
(a) Private Company
Realised profits – Realised losses = €300,000
(a) Public Company
Net realised profits less Net unrealised losses = €300,000
B Limited:
(a)Private Company
€800,000 – €200,000 = €600,000
(a)Public Company
€600,000 – €100,000 = €500,000
Connolly – International Financial Accounting and Reporting – 4th Edition
Distributable profits
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Companies are allowed to record non-current assets at valuation in the
SFP rather than depreciated historical cost (IAS 16 Property, Plant and
Equipment – See Chapter 6).
• If the valuation is higher than the depreciated historical cost, this will lead
to a higher depreciation charge in the financial statements and therefore
lower profits (relative to historical cost-based financial statements).
Consequently, any excess depreciation on a revalued non-current asset
above the amount of depreciation that would have been charged on its
historical cost can be treated as a realised profit for the purpose of
distributions.
EXAMPLE 18.2: EXCESS DEPRECIATION ON REVALUED ASSETS
Assume a company buys an asset for €20,000, which has a life of four
years and a nil residual value. If it is immediately revalued to €30,000, an
unrealised profit of €10,000 would be credited to the revaluation reserve.
Annual depreciation must be based on the revalued amount, in this case,
25% of €30,000 or €7,500. This exceeds depreciation, which would have
been charged on the asset’s cost (€5,000 p.a.) by €2,500 per annum. This
€2,500 can be treated as a distributable profit.
Connolly – International Financial Accounting and Reporting – 4th Edition
Realised and Unrealised Profits and Losses
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Company legislation typically does not specifically define realised profits
or unrealised profits; instead it states that any determination of whether
a profit or loss is realised must be made in light of best accounting
practice .
The following are the rules contained in company legislation with respect
to determining whether a profit or loss is realised or unrealised:
 a provision made in the accounts is a realised loss
 a revaluation surplus is an unrealised profit
 the difference between the depreciation charge based on the
revalued amount and the depreciation charge based on the book
cost should be regarded as a realised profit
 on the disposal of a revalued asset, any unrealised surplus or loss
on valuation immediately becomes realised
 if there is no available record of the original cost of an asset, its cost
may be taken as the value put on it in the earliest available record
 if it is impossible to establish whether a profit or loss brought
forward was realised or unrealised, any such profit may be treated
as realised and any such loss as unrealised
Connolly – International Financial Accounting and Reporting – 4th Edition
Revaluation deficits
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A provision made in the accounts is a realised loss. Therefore, a revaluation
deficit is a realised loss.
However, if a revaluation deficit arises on a revaluation of all non-current
assets (or on a revaluation of all non-current assets other than goodwill), the
revaluation deficit is an unrealised loss.
Where a company undertakes a partial revaluation of non-current assets,
a deficit on one asset is a realised loss and cannot therefore be offset
against a surplus on another asset (an unrealised profit) for the purposes of
arriving at distributable profits.
A partial remedy to this problem is contained in company legislation. This is
illustrated in Example 18.3.
Deficits arising on an asset where there has been a partial revaluation of
the assets are to be treated as unrealised losses provided that:
 the directors have ‘considered’ the aggregate value of the non-current
assets which have not been revalued at the date of the partial
revaluation;
 the directors are satisfied that the aggregate value is not less than their
aggregate book value; and
 a note to the accounts states the above two facts.
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 18.3: Revaluation of assets
X Limited has the following statement of financial position:
Net Assets
Share capital
Share premium
Revaluation reserve
Retained earnings
€000
300
100
50
70
80
300
Two of the company’s assets were revalued during the year, one
giving rise to a surplus of €100,000, the other a deficit of €30,000.
Requirement What are the profits available for distribution and how
would the figure differ if all the company’s assets had been
revalued?
Connolly – International Financial Accounting and Reporting – 4th Edition
Example 18.3: Revaluation of assets
Solution
Profits available for distribution:
Retained earnings
Less realised losses (revaluation deficit)
€’000
80
(30)
50
If all the company’s assets had been revalued (or the directors
had ‘considered’ the value of the assets not revalued), the
revalued deficit would be unrealised and therefore the profits
available for distribution would be €80,000.
Connolly – International Financial Accounting and Reporting – 4th Edition
Revaluation surpluses and Development expenditure
Revaluation Surpluses
• Revaluation surpluses are unrealised profits in the accounting
period in which the revaluation takes place and therefore not
available for distribution.
• The only exception to this rule is where the same asset was:
 previously revalued giving rise to a deficit; and
 the deficit was treated as a realised loss.
• In such a case, the revaluation surplus will be a realised profit to the
extent that it makes good the realised loss.
• Revaluation surpluses can eventually become realised profits when
the asset is either depreciated or sold.
Development Expenditure
• Deferred development expenditure is treated as an unrealised
loss if the expenditure is carried forward under the provision of IAS
38 Intangible Assets (see Chapter 9).
Connolly – International Financial Accounting and Reporting – 4th Edition