12 June 2002
Mr Richard Mifsud
Australian Accounting Research Foundation
600 Bourke Street (Level 10)
MELBOURNE VIC 3000
Payment of Dividends under the Corporations Act 2001
The Group of 100 (G100) is pleased to comment on proposals in Discussion Paper No. 5 'Payment of Dividends under the Corporations Act 2001'. The G100 agrees that it is now time to advance proposals for the reform in respect of placing emphasis on solvency as a basis for the payment of dividends rather than constructs such as profits.
Do you agree that the existing payment of dividend provisions in
the Corporations Act 2001 are in need of changes?
Yes. The G100 believes that the existing requirements in respect of dividends reflect a reliance on past practice and precedence and are constrained by an emphasis on the existence of profit whether or not it is earned in the period of the dividend. The existing requirements are inconsistent with the trend towards solvency in other provisions of the Corporations Act and recent international developments.
Is the adoption of a solvency test for determining the payment
of dividends the best option for change?
Yes. The G100 believes that with appropriate protections in respect of creditors the solvency of the company is a reasonable basis for determining the capacity to pay dividends. This is particularly so in an environment where unrealised changes in value are recognised in the measurement of profit. The G100 believes that unrealised changes in value should be recognised as part of equity and recognised in operating earnings upon realisation.
Is it desirable to require companies to specify the extent of
their solvency and the position allocated to dividends?
No. This approach appears to reflect a presumption that there is a 'solvency pie' to be allocated for various purposes including the payment of dividends. Directors are in the best position to determine the solvency of a company and its capacity to fund a dividend distribution, which is likely to vary from period to period. In addition, directors presently have significant obligations regarding the solvency of a company. We believe that the proposals should clarify whether solvency is to be addressed on a 'stand-alone' basis or whether the existence of guarantees and indemnities are taken into account when determining solvency.
What are your views on applying, as an alternative, a going
concern test to the payment of dividends?
The financial reports of a company are prepared on the basis of the going concern assumption. If the financial reports are prepared on this basis we see no further purpose is served by a further going concern overlay.
Are there any other matters that you believe should have been
considered in the discussion paper?
Do you believe there is a need for the solvency payment of
dividend approach to distinguish the composition of the dividend so determined between
different tax treatments or do you believe that it is a matter for tax legislation?
The G100 believes that the tax status of dividends is a matter to be determined by tax legislation irrespective of the basis of approach of the rules for payment of dividends.
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