Distributable profits : bridging the gap between the Companies Act and the financial reporting framework

Abstract

PURPOSE: The purpose of this study is to analyse the gap that arises between the Maltese Companies Act (MCA) and the financial reporting framework in determining distributable profits (DP). Since dividend restrictions feature as one of the main pillars of the capital maintenance (CM) doctrine established by Directive 77/91/EEC, the study also aims to assess the adequacy of the current capital formation (CF) rules as well as the extent to which practitioners feel that the restrictions on DP are important for the purposes of maintaining capital and protecting creditors. DESIGN: After the preliminary research phase which enabled the formulation of the research objectives, a purely qualitative course of action was undertaken. Twenty-four semi-structured interviews were conducted with accountants having different backgrounds, corporate lawyers as well as the Malta Association of Credit Management (MACM). The primary data collected was subsequently analysed in the light of the pertinent secondary data to address the research objectives. FINDINGS: Whereas the participants expressed mixed views when discussing the adequacy of the CF rules, these seemed to agree that dividend restrictions are the most important pillar of the CM doctrine. In turn, most of the accountants claim that the current distribution rules pose significant challenges to the extent that sometimes, they seek guidance from foreign sources, and the limited guidance on DP by no means implies that the accounting profession shares a common understanding on the realisation principle in the MCA. CONCLUSION: Based on the lack of common understanding manifested by participants on the current rules, which in practice is replicated by an inconsistent approach, the study concludes that the Maltese accountancy profession necessitates additional guidance on DP. VALUE: Back in 2005, the Malta Institute of Accountants (MIA) initiated a project to draft a set of guidance notes on DP; a project which was subsequently abandoned due to limited resources. A decade down the line, this study sheds light on whether the MIA should restart this project and puts forward several technical recommendations.