THE FRC’s Financial Reporting Lab has issued its “Disclosure of dividends – policy and practice” report which explores how companies can make dividend disclosures more relevant for investors.
The report, which builds on the contributions of 19 companies and 31 investors, said disclosures need to be clear and provide enough information for investors to evaluate the board’s stewardship of the company and assess prospective dividends.
How decisions around dividend policyare made, what the policy will mean in practice and the risks and constraints associated with the policy were key investor concerns, the FRC found.
Investors told the FRC that they also want disclosure of the circumstances in which companies expect to pay special dividends or buy back shares, and whether they are in the best interests of shareholders.
Melanie McLaren, executive director of codes and standards at the FRC, said: “Companies, investors and the FRC consider that disclosure of dividend policy and resources, including distributable profits, may be helpful. In addition to demonstrating the board’s stewardship of the company, they provide key information used by investors in evaluating the extent to which returns may be provided in the form of dividends in future.”
All investors consider that the disclosure of dividend resources, i.e. cash and the amount of the company’s reserves legally available for distribution under company law (distributable profits), is helpful in circumstances where the business is unable to pay the dividends indicated by the policy.
Some investors also believe that distributable profits are always required to be disclosed. The FRC understands that the Companies Act 2006 does not require companies to identify separately distributable profits on their balance sheet.
The dispersal of disclosures across annual reports and other communications was found to result in repetition, and makes it hard for investors to find the information they need. They said it would be helpful to group together similar or related disclosures on dividends, or to draw links between the disclosure elements.
James Chalmers, PwC’s UK head of assurance,said extensive technical disclosure by companies with ample resources should be avoided “as this will only add to the clutter of the annual report”.
“Good practice will be to give more detailed disclosures where the availability of resources could, in future, restrict a company’s ability to pay dividends,” he said.
“The concerns raised by investors are unlikely to be addressed by mandating a more detailed analysis of legal reserves of the parent company and in some cases this could even be misleading as it is companies, not groups, which distribute dividends.”