Financial Reporting Lab:
Disclosure of dividends –
policy and practice
Slides accompanying project report, November 2015
2
Disclosure of dividends - Project overview
Initiated in response to interest of long-term institutional investors in the
disclosure of distributable profits.
Scope broadened to incorporate interest in wider aspects of disclosure
relating to dividends.
Participation included 19 companies and 31 investment organisations.
Project observations:
•
Dividend policy disclosure;
•
Disclosure of practice under the policy; and
•
Other observations.
3
Project observations – Interaction between the
dividend and reporting cycles
The dividend cycle
comprises two main
decisions:
•
Dividend policy
decision.
•
Dividend
declaration
decision.
4
Project observations
Investors consider that good dividend disclosures should answer the following
questions:
•
Why this policy?
•
What does the policy mean in practice?
•
What are the risks and constraints associated with the policy?
•
What was done in practice to deliver under the policy?
“Defined parameters that are well understood by a company’s key stakeholders can help
build common expectations of the company’s likely behaviour, and help to strengthen its
profile in the eyes of investors.” Investor
5
Project observations – Dividend policy disclosure
Why this policy?
Disclosures that answer this question:
•
Describe the rationale for the policy (including policy not to pay
dividends).
•
Relate the policy to the company’s business model, strategy and capital
management strategy.
•
Summarise the process the board has been through in setting the
policy.
6
Project observations – Dividend policy disclosure
What will the policy mean in
practice?
APPROACH
PROGRESSIVE
Disclosures that answer this
question are specific enough to:
Describe what
progressive means:
• Maintaining or
increasing
• Over interim/annual
periods
PAYOUT RATIO
Define the basis for the
ratio:
• IFRS profit or cashflow
measure
• Any adjustments
made
SPECIFICS
• Rationale for the basis
Clarify the level of
growth:
• Minimum, range,
target or specific
• Measurement criteria
such as currency or
inflation index
Clarify:
• Level of the ratio
• Whether it is a
minimum, range, target
or specific ratio
Timeframe and process
7
Project observations – Dividend policy disclosure
What are the significant risks and constraints associated with the policy?
Disclosures that answer this question:
•
Explain how they were considered in setting the policy.
•
Discuss the nature of significant risks to the policy and constraints which may
impact the policy’s future implementation.
•
Describe the current status of risks and constraints and how they may impact
the policy in the future.
Investors are looking for disclosure on how companies balance competing
priorities such as capital expenditure, other investment needs and debt and credit
rating targets.
“Management teams are not painting themselves into a corner when providing detailed
disclosures; we know that the unexpected can and does happen to companies in the real
world.” Investor
8
Project observations – Dividend declaration
What was done in practice to deliver under the policy?
Disclosures that answer this question:
•
Detail any remaining steps for approval (such as shareholder vote at AGM);
•
Relate the declared dividend to the policy;
•
Explain any departure from the policy;
•
Clarify the timing and amount of the dividend;
•
Discuss key judgements made, discretion exercised, and how significant
risks and constraints were considered; and
•
Disclose dividend cover (even if the policy takes another approach).
9
Project observations – Dividend declaration
Disclosure of dividend resources
•
Investors consider that one important element of disclosure is dividend
resources i.e. available cash and the amount of distributable profits.
•
They consider that this disclosure is useful in circumstances where the
ability of the company to pay dividends is, or might be, constrained.
•
They suggest a range of disclosure reflecting overall position of the
company, they describe the following scenarios where dividend resources of
the parent may be: Abundant, Sufficient and Insufficient.
10
Information that helps investors understand dividend resources of the parent company
Most investors expect the level of disclosure to increase as dividend resources become more constrained
Dividend
resources at
Parent Company
Abundant resources in
comparison to proposed
dividend
Cash
Disclosure that puts cash resources in context of dividend
e.g. refers to cash disclosures (or provides disclosure) that
helps indicate sufficient cash available at parent.
Statement that confirms there are
insufficient accessible cash resources
available to pay the proposed dividend,
and actions planned to source cash, to
fund the proposed dividend.
Distributable
profits
Statement that the
company has distributable
reserves to pay ‘x’ years of
dividend at the current level
(or in line with the dividend
policy); or
Statement that confirms the dividend has
been modified, due to limited distributable
profits and;
Statement that provides understanding of
the context (e.g. indicate actions being
taken to address the issue); and
Numerical: distribution profit balance; and
See table below (if applicable)
Numerical: distributable profit
balance.
Sufficient resources in
comparison to proposed
dividend
Statement that the board has
assessed the level of
distributable profits and is
satisfied they are sufficient to
support the proposed dividend;
and/or
Numerical: distributable profit
balance; and
See table below (if applicable)
Insufficient resources available to
deliver dividend in accordance with
the policy
Other disclosure which may be helpful when the parent company is reliant on
entities below it for dividend resources:
What
Where
How
Narrative disclosure which gives context as to the capacity of the group to pass
cash to the parent and generate distributable profits at the parent.
Narrative or numerical disclosure which gives context to the entities that are significant
to providing the parent company with cash and/or distributable profits (linking to risks
as appropriate).
Narrative disclosure which gives insight into the group’s processes around moving
cash and/or generating distributable profits at the parent company level.
11
Project observations – Dividend declaration
Range of current practices relating to distributable profits includes statements that:
•
Parent company distributable profits are sufficient to support a multiple of the current
year dividend.
•
Parent company distributable profits are sufficient to support the proposed level of
dividend for the current year.
•
Parent has at least a specified amount of distributable profits.
•
Parent has a specified amount of distributable profits or a specified amount which is not
distributable.
•
Parent has specific reserves which are either distributable or are not distributable.
•
Parent has a specified amount of distributable profits, showing a breakdown of the
components.
The Lab created and tested an illustrative reconciliation of shareholders’ funds that shows
distributable and non-distributable components (see Appendix). The illustration also includes an
analysis of the parent company profit and loss analysis to understand sources of the parent
company’s profit and loss reserve.
12
Project observations – Dividend declaration
Investors find disclosure of the parent company distributable profits useful as it:
• Enhances confidence in the board by demonstrating that dividends are not
being proposed out of capital.
• Clarifies the headroom between the level of distributable profits and the
proposed dividend to assist in the shareholders’ vote on the approval of the
dividend.
• Provides some insight into the company’s ability to cover the future dividend
stream.
• May provide something of a proxy for realised profits.
Comment
Some investors participating in the project believe that the law always requires distributable profits to be
disclosed in the financial statements.
BIS has confirmed to the FRC that the Companies Act 2006 does not require the separate disclosure of
a figure for distributable profits.
13
Project observations – Other observations
Special dividends and share buybacks
Investors consider that special dividends and share buybacks are
important areas of disclosure. They consider good disclosure covers:
•
in what circumstances will the company use special dividends and
share buybacks;
•
for special dividends, investors are looking for similar disclosures to
those on ordinary dividends, i.e. policy and declaration;
•
for share buybacks, disclosure of the considerations prior to
undertaking the share buyback, the aggregated information on
buybacks to understand the impact of the buy back, and whether it is
ultimately in the best interests of shareholders.
14
Project observations – Other observations
Level of assurance on distributable profits
•
Investors value external assurance information. Some companies
consider it may not be practical to obtain assurance on the distributable
profits balance due to complexity and related cost.
•
Those investors who believe distributable profits are required to be
disclosed, also believe that the disclosure should be audited.
15
Project observations – Other observations
Bringing disclosures together
Investors consider that there is an opportunity for companies to bring disclosure
together to present a more concise and consistent narrative, they highlight that:
•
disclosures are currently dispersed resulting in repetition;
•
referencing related information can provide clarity and reduce repetition; and
•
some elements of dividend reporting may be useful online.
16
Appendix – Lab illustration
Parent company reconciliation of shareholders’ funds and profit and loss account analysis
Lab illustration – Parent Company reconciliation of shareholders’ funds
all in £ Millions
Share
Capital
NonDistributable
At 1 January 201X
Share
Premium
Account
NonDistributabl
e
Capital
Redemption Revaluation
Reserve Reserve
NonDistributable
NonDistributable
Own
Shares
Merger
Reserve
Distributable
NonDistributable
Available for Sale
Shareholders’ Funds
Profit and Loss Account
Total
Distributable
NonDistributable
Total
Distributable
NonDistributable
Total
Distributable
NonDistributable
100
45
55
380
350
30
1,178
245
933
500
45
22
25
(150)
256
Profit for the financial year
-
-
-
-
-
-
-
-
-
155
135
20
155
135
20
Other comprehensive income
-
-
-
-
-
-
(15)
(10)
(5)
-
-
-
(15)
(10)
(5)
Dividends paid
At 31 December 201X
-
-
-
-
-
-
-
-
-
(84)
(84)
-
(84)
(84)
-
500
45
22
25
(150)
256
85
35
50
451
401
50
1,234
286
948
Public company net asset test
Lab illustration – Parent Company profit and loss account analysis
all in £ Millions
201X
NonTotal
Turnover
Operating costs
Operating profit
Dividends received from subsidiaries
Fair value gains on investments in subsidiaries
and joint ventures
Interest receivable and similar income
Interest payable and similar charges
Revaluation of investment property
Profit on ordinary activities before taxation
Taxation on profit on ordinary activities
Profit for the financial year
Net profit available for distribution as above
286
Less unrealised losses
(25)
Profits available for distribution
261
Distributable Distributable
210
(10)
200
210
(10)
200
10
40
10
-
30
(75)
(10)
195
(40)
155
30
(75)
165
(30)
135
40
(10)
30
(10)
20
The shaded sections separate out the distributable and nondistributable components. This disclosure is not currently
common practice in the UK.
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