In February 2009 I posted a thread concerning the disclosure of dividends on the face of the profit and loss account and why this requirement was repealed in 2007.

The debate within the profession rages on about whether (or not) dividends to directors who are also shareholders should be disclosed as a related party transaction under the principles of FRS 8 ‘Related Party Disclosures’.  Certainly the view is mixed with hundreds of qualified accountants saying they are NOT a related party transaction because dividends are not, strictly speaking, a transaction; more they are merely a distribution of profit.  Others (including some (if not all) of the professional Institutes) take the view that they are a disclosable transaction which is caught under the provisions of FRS 8.  Indeed some QAD Inspectors from the ICAEW and ACCA Monitoring Officers, in various publications, have cited the lack of disclosure under Related Parties concerning dividends to director/shareholders but the argument carries on, mainly because of the substantial number of ‘grey areas’ contained within FRS 8.

FRS 8 cites a number of examples which are disclosable under its scope:

- purchases or sales of goods (finished or unfinished)
- purchases or sales of property and other assets
- rendering or receiving of services
- agency arrangements
- leasing arrangements
- transer of research and development
- licence agreements
- provision of finance (including loans and equity contributions in cash or in kind)
- guarantees and the provision of collaterial security
- management contracts

Because of the changes to Companies Act 2006 on 6 April 2007, directors’ interests in the shareholding of a company are no longer disclosed within either the Directors’ Report or the notes to the financial statements.  Prior to this it was accepted that a user of the financial statements could determine dividends to directors on the basis of their shareholdings which was deemed sufficient to meet the related party transaction disclosure.

Dividends to directors who are also shareholders do, in fact, meet the definition of a related party transaction and as such should be disclosed within the full (i.e. the shareholders’) financial statements. Such a disclosure, however, is not a requirement under the UK’s Companies Act (it is a requirement under FRS 8) and as such is not required to be disclosed within the abbreviated financial statements.