On December 19, 2016 the Financial Reporting Lab published an implementation study on the disclosure of dividends, examining how companies have responded to investor calls for better disclosure of dividends, as set out in the Lab’s November 2015 project report, “Disclosure of dividends – policy and practice”.
Summary of findings from the 2015 project report
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Lab project participants identified good disclosure of dividend policy as providing an understanding of the board’s considerations in setting the policy, the rationale for the approach selected, and sufficient detail to understand how the policy will operate.
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Lab project participants identified good disclosure of dividend practice as providing the key judgements and constraints considered by the board in applying the dividend policy, the availability of dividend resources (cash and distributable profits) to pay dividends, and clear linkage from the disclosed policy to the application of the policy in the period.
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Investors found that bringing together various elements of disclosure to provide a focused narrative is helpful.
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An area of particular interest to investors is the availability of resources needed to pay a sustainable dividend stream.
How practice is changing based on the Lab’s review of dividend disclosures in annual reports published between December 2015 and July 2016
In summer 2016 the Lab undertook a review of FTSE 350 dividend disclosures to assess how practice had changed following its 2015 project report. 177 companies published their annual reports in the scope period. The Lab identified 120 annual reports for detailed review and found enhancements in reporting from 28 companies.
Key areas where companies enhanced disclosure include examples that explain the details of the dividend policy and how it is intended to operate, add context on factors considered in adopting the policy (with some including the approach to capital management), explain the relevance of dividend resources, and bring together disclosure related to dividends.
Examples of good practice
The implementation study includes examples of good practice for various types of disclosure, as follows:
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disclosure that details the policy and provides insight into factors relevant to the setting of the dividend;
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disclosure which provides information on dividend resources;
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disclosure which confirms sufficiency and availability of distributable reserves, narratively;
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disclosure which brings relevant dividend information together; and
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disclosure which brings relevant dividend information together.
Areas for further improvement
The implementation study notes that improvements identified often focus on additional disclosure around distributable profits; however, the Lab believes that enhancements in the following areas would also be welcomed by investors:
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more detailed disclosure of how dividend policies operate in practice, with more clarity on factors considered in both the setting of the policy and in dividend declaration; and
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disclosure of risks and constraints where they impact dividend policy and declaration decisions (especially pertinent to concerns around pension deficits, the potential impact of Brexit and other factors that may have a bearing on capital management decisions).
(Financial Reporting Lab, Lab implementation study: Disclosure of dividends - policy and practice, 19.12.16)