Directors’ remuneration and dividend disclosure requirements
A closer look at FRS 102 1A.
ACCA’s Technical Advisory helpline has had many calls concerning the disclosure of directors’ salaries and dividends in small owner-managed companies that adopted FRS 102 section 1A.
There is currently very little guidance issued by FRC on exactly what the disclosure requirements are in respect of directors’ remuneration and dividends for a small company. The following may help you.
Statutory requirement to disclose the directors’ remuneration in a small company’s accounts
The requirement to disclose directors’ remuneration in the financial statements of a small company was repealed by Statutory Instrument 2015 No 980.
Previously the requirement to disclose the information about directors’ remuneration was stated in Schedule 3 of SI 2008 No 408.
However, paragraph 20 of SI 2015 repealed that particular section and so small companies can take advantage of the exemption to disclose directors’ remuneration, for financial years beginning on or after 1 January 2016.
Accounting standards requirement to disclose directors’ remuneration in a small company’s accounts
Directors’ remuneration requires disclosure under section 1A of FRS 102 if it comprises a material transaction which has 'not been concluded under normal market conditions' (paragraph 1AC.35).
For an owner-managed company, it is not uncommon to organise directors’ remuneration and dividends to benefit the business which is also in a tax-efficient manner. For example, a director who is also a shareholder is normally paid a salary up to the National Insurance Lower Earnings Limit threshold, with any additional remuneration being taken in the form of dividends. That sort of arrangement can be seen as being normal market conditions and hence no disclosure is needed.
However, professional judgement is required based on the specific circumstances to determine what constitutes ‘normal market conditions’. These may vary from company to company.
Disclosure of dividends paid by a small company
FRS 102 1A Appendix D only encourages small companies to disclose dividends declared and paid or payable during the period (paragraph 1AD 1 d). Because ‘encouraged’ disclosure is not a statutory requirement, technically, if a company does not include the ‘encouraged disclosure’ it is not in breach of a legal or statutory requirement.
However, consideration may be required as to whether financial statements give a ‘true and fair’ view without the relevant disclosures.
Disclosure of directors’ remuneration/dividends and ‘true and fair’ view
The ‘true and fair’ requirement has been fundamental to accounting in the UK for many years. It is a requirement of both UK and EU law.
Directors must consider whether, taken in the round, the financial statements that they approve are appropriate. Section 393 of the Companies Act 2006 requires that the directors of a company must not approve accounts unless they are satisfied that they give a true and fair view.
The concepts of usefulness and ‘true and fair’ are, in the context of financial statements, inseparable - for financial statements to be useful, they must present a true and fair view.
In conclusion, before a decision is made as to whether to disclose directors’ remuneration and dividends, consideration should be given to the readers of accounts (especially if there are external shareholders not involved in running the business) as non-disclosure may have an impact on usefulness and ‘true and fair’ presentation.
If directors’ remuneration is disclosed in a note, does the note need to be filed at Companies House?
Filing obligations of companies subject to the small companies’ regime are stated in Companies Act 2006. Section 444 states that ‘the directors of a company subject to the small companies’ regime must deliver to the registrar for each financial year a copy of the balance sheet drawn up as at the last day of that year'.
Since the related party transactions note is a balance sheet note it would have to be placed on the public record. So, if the directors of a small company conclude that a low salary and a high dividend combination does not constitute a transaction concluded “under normal market conditions’, the note would need to be filed as a balance sheet note and included under the heading ‘related party disclosure’.
Whatever decision is reached, it is advisable to document the reasoning behind it.
Other directors’ transactions
Section 413 of Companies Act 2006 requires disclosure of the details of any advances or credits granted by a company to its directors. As this is a Companies Act requirement, the information must be disclosed regardless of whether the transactions take place ‘under normal market conditions’ or not.
The details required of an advance or a credit are:
(a) its amount (b) an indication of the interest rate (c) its main conditions (d) any amounts repaid (e) any amounts written off (f) any amounts waived.
There must also be stated in the notes to the financial statements the totals of amounts stated under (a), (d), (e) and (f). The details required of a guarantee are:
(a) its main terms (b) the amount of the maximum liability (c) any amount paid and any liability incurred by the entity for the purpose of fulfilling the guarantee (including any loss incurred by reason of enforcement of the guarantee).
There must also be stated in the notes to the financial statements the totals of amounts stated under (b) and (c).
Dividend and changes in equity disclosure for small companies
FRS 102, paragraph 1A.9 encourages a small entity to present a statement of changes in equity or a statement of income and retained earnings (SOIRE). The statement presents an entity’s profit or loss and changes in retained earnings for a reporting period.
Information to be presented in the SOIRE are (FRS 102 paragraph 6.5):
retained earnings at the beginning of the reporting period;
dividends declared and paid or payable during the period;
restatements of retained earnings for corrections of prior period material errors;
restatements of retained earnings for changes in accounting policy; and
retained earnings at the end of the reporting period.
However, a small company can ‘fillet out’ the statement of changes in equity when it files its financial statements at Companies House. Accordingly even if the dividend is included in SOIRE, that information is not required to be filed at Companies House.
Further guidance from ACCA
The following technical factsheets provide guidance on a number of accounting areas with worked examples: