Realised profits Law and Regulation
the transitional arrangements in
FRS 10, that goodwill remains eliminated against reserves, FRS 10 continues the application of the guidance in Appendix 2 to SSAP 22 (which is reproduced, almost verbatim, as Appendix V of FRS 10). This states that where goodwill is written off on acquisition as a matter of accounting policy (ie, under the immediate write-off method) rather than because of an actual diminution in value, the write-off does not constitute an immediate realised loss but becomes a realised loss over its useful economic life at the same time and to the same extent as would be the case if the company had adopted a policy of capitalisation and amortisation of the goodwill.Negative goodwill in an individual company 43.
FRS 10 requires that negative goodwill up to the fair values of the non-monetary assets acquired should be recognised in the profit and loss account in the periods in which the non-monetary assets are recovered, whether through depreciation or sale. FRS 10 requires that where the negative goodwill exceeds the value of the non-monetary assets, this excess should be recognised in the profit and loss account in the periods expected to be benefited. Negative goodwill recognised in the profit and loss account in accordance with FRS 10 represents a realised profit except in the case of a sale of the nonmonetary assets where the consideration received is not qualifying consideration.44. Where negative goodwill was accounted for under SSAP 22 in the accounts of an individual company, it would have been regarded initially as an unrealised profit. It will become a realised profit on the same basis as if it had been negative goodwill accounted for under
FRS 10.APPENDIX A INTRA-GROUP TRANSACTIONS
Introduction A1. Under both common law and statute, distributions are made by companies and not by groups. The group accounts are therefore not relevant for the purpose of determining realisation or distributability; for example, realised profits which are reflected in a parent' s 12 own accounts may be eliminated in the group accounts, and profits retained by subsidiaries are not distributable by the parent.
A2. The ability of a parent to control the actions of its subsidiary must also be borne in mind when considering the substance of an intra-group transaction carried out by or with that subsidiary.
A3. It is not practicable to attempt to illustrate every circumstance in which difficulties may arise in determining whether a profit is realised. The principles set out in this guidance should be applied in relation to the group company seeking to establish a realised profit; in particular, those provisions of paragraph 12 which relate to artificial, linked (whether legally or otherwise) or circular transactions or arrangements should be applied. The examples which follow are intended to illustrate the factors to be considered in determining whether intra-group transactions give rise to realised profits.
Cash pooling arrangements and group treasury functions A4. In a group, where there is a cash pooling arrangement or a similar group treasury function, from the perspective of the company seeking to establish a realised profit an increase in debt due from, and/or a decrease in debt due to, the group finance/treasury company will constitute qualifying consideration, provided it: (a) is not a transaction or arrangement that falls within paragraph 12 of this guidance; and (b) meets the criteria in paragraph 18 of this guidance.
An example of a cash pooling arrangement is where a group finance/treasury company effectively acts as a banker by accepting funds and settling debts on behalf of the group company seeking to establish a realised profit.
Dividends
Dividend received or receivable on an investment in a subsidiary A5. In order for a dividend received or receivable from a subsidiary to be treated as a realised profit, the consideration must be in the form of qualifying consideration. It will also be necessary to consider the effect any dividend has on the value of the investment in the subsidiary and, where its recoverable amount has fallen below its book value, to take account of the effect of any such impairment (and, where appropriate, any consequential release from revaluation, merger or other similar reserve). Dividend by a subsidiary to a parent which provides or reinvests the funds in the subsidiary A6. Investment by a parent in a subsidiary which has paid a dividend in the form of qualifying consideration does not in itself preclude that dividend from continuing to be treated as a realised profit by the parent. However, if a subsidiary pays a dividend to a parent which directly or indirectly provides the funds for the dividend or reinvests the proceeds in the subsidiary in circumstances where the transactions or arrangements fall within paragraph 12 of this guidance, the dividend will not represent a realised profit for the parent if it does not receive in return for the provision of funds or their reinvestment an asset which is in the form of qualifying consideration. Thus, in such a case, the profit will be unrealised if, for example: (a) the provision or reinvestment of funds is in the form of:
(i) a subscription for shares, as the subsidiary is in effect capitalising its realised profits; or (ii) a capital contribution (ie, a gift); or (iii) a loan which does not meet the definition of qualifying consideration; or (iv) a guarantee of borrowings used to fund the dividend (unless the likelihood that the guarantee will be called upon is remote); or (b) the subsidiary is unlikely to be able to meet its obligations under any borrowings used to fund the dividend without recourse directly or indirectly to the parent.
Dividends received out of pre-acquisition profits A7. The Act does not deal specifically with the onward distribution by a parent of dividends out of the pre-acquisition profits of its subsidiaries. Such dividends should be treated by a parent in the same way as any other dividend which it receives from a subsidiary, including taking account of any impairment in accordance with paragraph A5.
Sale of an asset by a parent to its subsidiary A8. If a parent sells an asset to a subsidiary in circumstances where the transactions or arrangements fall within paragraph 12 of this guidance, any profit on the sale of the asset will not represent a realised profit for the parent if it does not receive an asset which is in the form of qualifying consideration. Thus, in such a case, the profit will be unrealised if, for example: (a) there is an agreement or understanding regarding the repurchase of the asset by the parent; or (b) the parent directly or indirectly provides the funds for the purchase or reinvests the proceeds in the subsidiary where the provision or reinvestment of funds is in the form of:
(i) a subscription for shares; or (ii) a capital contribution (ie, a gift); or (iii) a loan which does not meet the definition of qualifying consideration; or (iv) a guarantee of borrowings used to fund the purchase (unless the likelihood that the guarantee will be called upon is remote); or (c) the subsidiary is unlikely to be able to meet its obligations under any borrowings used to fund the purchase without recourse directly or indirectly to the parent.
Sale of an asset by a subsidiary to a parent followed by a dividend to the parent of the resulting profit A9. The subsidiary should apply factors similar to those in paragraph A8 in determining whether it has made a realised profit on the sale of an asset to its parent.
A10. If a subsidiary sells an asset to its parent and
12 The terms ' parent' and ' subsidiary' refer respectively to a ' parent undertaking' and a ' subsidiary undertaking' as defined in section 258 of the Companies Act 1985.