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Below is a practice problem appeared in ACCA study hub.
(Background)
Dee and Eff are major shareholders in, and the directors of, the public company, Fan plc. For the year ended 30 April 20X5 Fan plc’s financial statements showed a loss of £2,000 for the year.
For the year ended 30 April 20X6 Fan plc made a profit of £3,000 and, due to a revaluation, the value of its land and buildings increased by £5,000.
(Question)
Which of the following statements describe the profits available for distribution by a public limited company?
A. Accumulated realised profits
B. Accumulated realised and unrealised profits less accumulated unrealised losses
C. Net realised profits
D. Net realised profits less net unrealised lossesAnswer: D
What I don’t understand is why they minus Net unrealised losses from Net realised profits to calculate the distributable profits?
Distributions must come from “profits available for that purpose” which I think is referring to “Net realised profits” only.
Net realised profits itself would have excluded any unrealised profits/losses over time just like revaluation surplus is set out in a separate account from realised profits.
Could you help me clarify it, Sir?
Section 831 Companies Act 2006! A PUBLIC company may make a distribution so long as its net assets are at least equal to the aggregate of its share capital plus its undistributable reserves.
It’s an “extra” requirement specifically for plcs. The effect of this, in “simple” words is that, in the calculation of the amount available for distribution, having arrived at accumulated realised profits less accumulated realised losses, we must take this extra step and deduct also any accumulated unrealised losses.
The idea (again, put simply) is to ensure that, if / when those unrealised losses crystallise, there should be already retained within the company sufficient realised reserves to cover the newly-crystallised losses (that previously had been unrealised)
Is that ok for you now
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