UK: Share Schemes - Draft ICAEW Guidance on the Impact on Distributable Profits of Employee Share Trusts and Accounting for Share Based Payments

Last Updated: 4 August 2004
Article by David Pett and Lynette Jacobs

Originally published July 2004

Last month the English and Welsh Institute of Chartered Accountants (ICAEW) published a Technical Release (TECH 21/04) containing draft guidance concerning how changes to the accounting regime for employee share schemes affect companies' distributable and realised profits.

The Technical Release considered the implications of UITF 38 ‘Accounting for ESOP trusts’ and UITF 17 (revised 2003). UITF 17 will be replaced by the new Share Based Payment Standard FRS20 but the guidance set out in the Technical Release will also be applicable to that new Standard.

Action Checklist

  • If you want to make comments on TECH 21/04, they need to be submitted to the ICAEW by 27 August 2004
  • For PLCs, check the impact of TECH 21/04 and UITF 38 on your distributable profits
  • For PLCs, if you plan to use an employee share trust to acquire shares in the market, check that under the new treatment you will have sufficient distributable reserves to enable you to provide the necessary financial assistance

UITF 38: employees' trusts

Distributable profits

UITF 38 which was issued in December last year provides that shares held in an employees' trust are to be deducted in arriving at shareholders' funds. The previous UITF 13 required them to be recognised as assets of the sponsoring company and there has been uncertainty as to the effect of the change on a company's distributable profits.

Distributable profits are defined as realised profits less realised losses and the draft guidance considers that the acquisition of shares by an employees' trust is not itself a distribution and the purchase of shares into an employees' trust is not an immediately realised loss affecting distributable profits under Companies Act 1985 section 263.

Additional restriction on dividends for plcs

Section 264 sets a further limitation on profits which can be distributed. A public company can only make a distribution to the extent its net assets exceed its called up share capital and undistributable reserves as defined in the Companies Acts.

  • For a public company, the purchase of shares in the market by an employees' trust will reduce distributable profits under Companies Act 1985 section 264, because there will be a reduction in net assets equal in amount to the consideration paid for the shares, but the new account for the shares within shareholders funds, required by UITF 38, is not called up share capital nor undistributable reserves.
  • Likewise, a subscription for new shares by an employees' trust will reduce distributable profits under Companies Act 1985 section 264, because although there is no change in net assets, the issue of new shares creates more called up share capital and increases the share premium, which is an undistributable reserve.

Financial assistance: additional rules for plcs

The exemption from the Companies Act financial assistance rules for employee share schemes is subject to a special restriction for public companies. Under Companies Act 1985 section 154, either net assets must not be reduced or, if they are, the reduction must be covered by distributable profits.

As UITF 38 has the effect of reducing net assets when a trust purchases shares, public companies with little or no distributable profits may therefore be prevented from sourcing shares for their employee share schemes using existing shares acquired by an employees' trust. Instead, they may only be able to grant rights to subscribe for new shares.

In some cases, a change of accounting policy to reflect UITF 38 may have the effect of reducing net assets below the level of distributable profits. The Technical Release considers this will not affect the lawfulness of earlier financial assistance at the time it was given. It may however prevent a public company from entering into any further transactions involving financial assistance.

This will be a particular problem where there is little or no 'headroom' within the institutional shareholder dilution limits in the company's share plans.

UITF 17 and the new rules on Share Based Payment

UITF 17 required an accounting expense, through the profit and loss account, with a matching credit to shareholders funds, for share or option awards based on the difference between the fair value of shares at grant and the amount payable by the employee. Fair value was defined as the market value of the shares, so an expense only arose if options were granted at a discount.

To date, accounting expenses for share options as a result of UITF 17 have been fairly uncommon. For quoted companies, discounted options have been discouraged by institutional guidelines. SAYE options were usually granted at a 20% discount but benefited from an exemption under UITF 17. For unquoted companies where it was more common to grant options at a discount, the potential expense was often regarded as immaterial and not recognised in the accounts.

In future, under the new accounting rules on Share Based Payment, the fair value of options will usually be derived using some form of option pricing theory (such as Black Scholes). This is likely to give rise to a much larger cost than arose under UITF 17 and much more frequent expenses, as option pricing theory normally gives a positive value even to market value options.

The Technical Release has concluded that it will be appropriate to regard the expense in the profit and loss account and the matching credit to shareholders' funds as realised losses and realised profits respectively such that the required accounting treatment will have no effect on distributable profits.

Consultation

Copies of TECH 21/04 are available from the website of the ICAEW and the deadline for sending comments to the ICAEW is 27 August 2004.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.