A) ‘The sums available for payment of a dividend depends on a company being able to satisfy both a profit and loss (realised profits) test and a balance sheet test’- Explain the profit and loss test and the balance sheet test and consider the accuracy of the above statement in relation to both public and private companies.
Paying a dividend is the usual way for a company to distribute a share of its profits among the shareholders. A dividend is an amount payable to a shareholder from profits or any other distributable reserve. [ACCA Paper F4, Page 248] Dividends become a debt only when declared and due for payment, however they are a source of taxable income to shareholders. A dividend can only be paid out of profits distributable by law. This means that dividends cannot paid by certain profits. A company’s undistributable reserves are its Share Premium Account, Capital Redemption reserve, any other reserve and also the amount by which its accumulated unrealised profits exceed its accumulated unrealised losses. [Companies Act 2006, Section 831]. For any public or private company it must be able to pay its dividends out of its distributable profits. Distributable profits are; accumulated realised profits less accumulated realised losses. Distribution cannot exceed the amount arrived by the application of the formula - Net assets less the called up share capital plus undistributable reserves. (Companies Act 2006, Section 831)
In relation to TSE Plc it must pay its dividends from its trading profit and net profit. To allow a company to pay its dividends it must meet certain requirements such as a ‘profit and loss test’ and a ‘balance sheet test’. Firstly, for the company to have distributable profit it must satisfy the profit and loss (realised profit) test. The realised profit test shows the profits available for distribution which is accumulated realised profits less accumulated realised losses, so for TSE the realised profit...
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