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Distributable reserves

Essentially, distributable reserves are accumulations of past profits. At one time it was necessary to distinguish carefully between capital and revenue profits, the former going to capital reserves, distribution of which was possible only under specified conditions, the latter going to revenue reserves, which were by definition always available for distribution. The situation was changed by the 1980 Companies Act. The emphasis is not now on the title of the reserve but on the manner of its accumulation and its contents. Basically, all realized profits, whether capital or revenue, that remain after provision has been made for realized losses in the same categories, may be distributed, except for such part of this net accumulated profit that has been previously distributed or has been capitalized.

There are, however, additional regulations appertaining to public companies. These must not only satisfy the above conditions but also show that such a distribution as proposed will not reduce their net assets to a figure below the sum of called-up capital and undistributable reserves. For this purpose undistributable reserves include not only share premium account and capital redemption reserve but also the amount by which unrealized capital profits which have not been capitalized (e.g. by issue of bonus shares) exceed unrealized capital losses. In this context additional depreciation consequent on revaluation of fixed assets may be written back into realized profits, though a surplus arising on a general revaluation would, of course, be an unrealized profit.

The extent of distributable reserves may be further restricted by a company’s own memorandum or articles.

Reference: The Penguin Business Dictionary, 3rd edt.