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Accounting roundup: More illegal dividends unearthed

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Two further publicly quoted companies in the United Kingdom have owned up to paying out illegal dividends.

The admissions from furniture company Dunelm and retail stockbroker Hargreaves Lansdown follow IPE’s report last week that Domino’s Pizza had uncovered problems with illegal dividend payments going back to 2000.

In a statement, Dunelm said its board had “become aware of an issue” with a dividend payment made in November 2015.

The company described the affair as a “technical infringement of the Companies Act 2006”.

Meanwhile, Hargreaves Lansdown admitted it breached the Companies Act by failing to file interim accounts to support dividend payments.

It is believed the breaches extend back to 2008. A random inspection by the UK’s Financial Reporting Council (FRC) picked up the issue.

The rules for determining whether a company can pay out a dividend or make a distribution are complex.

In the UK, the requirements are broadly set out in the Companies Act 2006. However, lawyers who spoke to IPE last March warned that companies must also consider the common law alongside the act.

The Local Authority Pension Fund Forum (LAPFF) has long argued that what it considers defective IFRS accounting standards put companies at risk of paying illegal dividends out of illusory IFRS profits. 

The row, which has culminated in calls for companies to ignore the FRC on the question of distributions, has also put the wider question of dividend payments under the microscope.

In addition to claimed flaws with the IFRS numbers, directors are also at risk of failing to comply with the requirement in the Companies Act to file interim accounts to show that their company has sufficient reserves to support a dividend.

Most recently, the affordability crisis among the UK’s defined-benefit pension schemes has left companies either unable to afford to pay a dividend or having to deal with a trapped dividend.

In other news, it has also emerged that the International Accounting Standards Board (IASB) has no plans to start work on its pensions accounting research project in the near future.

According to meeting papers posted on the board’s website: “The staff do not expect to begin work on any of the [research] pipeline projects in the next few months.”

At the conclusion of its agenda consultation last year, the board opted to assign a relatively low priority to pensions accounting and said it would focus on the effort as and when resources were available.

The IASB’s pension project is expected to examine pension benefits that depend on asset returns. The board decided not to investigate other aspects of accounting for post-employment benefits.

Finally, analysts at Barclays Bank have warned that the IASB’s new IFRS 9 accounting rules will increase volatility in bank earnings and capital.

IFRS 9 is the IASB’s replacement for its existing financial instruments accounting standard, IAS 39.

It comes into force on 1 January 2018. Supporters say that it will force banks to set aside provisions against expected losses on loans rather than wait for a loan to turn bad.

Critics of the model, such as the LAPFF, argue that it is too little too late.

The Barclays analysts wrote: “Capital headwinds in a downturn could be much more severe under IFRS9.”

They went on to warn that IFRS 9 could knock as much as 300bp off a bank’s common equity tier 1 ratio during a typical downturn.

The analysts also claimed that the provisions made under IFRS 9 will provide an insufficient buffer during a downturn.

Last year, IPE reported that the financial stability impact of the new standard was ‘unknown’.

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