The Companies Act 2006 never lists which profits are realised. Section 853(4) points instead to principles generally accepted when the accounts are prepared, and in practice those principles are set out in TECH 02/17BL, the joint ICAEW and ICAS guidance on realised and distributable profits. Its core test is that a profit is realised when it is received as “qualifying consideration”, which is cash, an asset readily convertible to cash, the release of a liability, or a receivable that is reasonably certain to be settled, judged on the overall commercial effect of linked transactions.

Why does guidance from accountancy bodies decide a legal question?

Section 830 allows distributions only out of accumulated realised profits less accumulated realised losses. Section 853(4) then says realised profits and losses are those treated as realised “in accordance with principles generally accepted at the time when the accounts are prepared”. The law therefore borrows its definition from accounting practice, and TECH 02/17BL is the statement of that practice.

The guidance was issued in April 2017, replaced TECH 02/10, and states that it represents generally accepted practice at 31 December 2016. ICAS notes that English and Scottish counsel confirmed it was consistent with the law at that date. Paragraph 1.8 says revisions should not be used to question distributions made earlier, but reserves must be examined again in light of it before a new distribution. Paragraph 1.9 adds that the guidance on what counts as a distribution is based on legal advice rather than practice, so some past transactions may have been unlawful distributions.

The practical application to a balance sheet is covered in distributable reserves under Part 23. This page explains how the guidance itself reasons.

What counts as a profit in the first place?

Paragraph 3.8 defines profit as income less expenses under the IASB Conceptual Framework and Section 2 of FRS 102, wherever it is recognised: profit and loss, other comprehensive income or directly in equity. It also includes amounts that are profits as a matter of law, such as gratuitous contributions of assets from owners and a merger reserve arising from relief under sections 611 or 612. Only once something is a profit does the realised question arise. A credit to equity on issuing convertible debt, for example, is not a profit at all.

When is a profit realised?

Paragraph 3.3 sets the principle: profits are realised only when realised in cash or in other assets whose ultimate cash realisation can be assessed with reasonable certainty, which can include fair value changes readily convertible to cash. Paragraph 3.9 then lists the ways a profit becomes realised, including:

  • a transaction where the company receives qualifying consideration;
  • a fair value change that is readily convertible to cash;
  • translation of a foreign currency monetary asset that is qualifying consideration, or of a liability;
  • reversal of a loss previously treated as realised;
  • a previously unrealised profit, such as a revaluation reserve, becoming realised when the asset is sold for qualifying consideration, depreciated, impaired, scrapped or distributed in kind.

Qualifying consideration (paragraph 3.11) is cash; an asset readily convertible to cash; the release, settlement or assumption by another party of a company liability; or a receivable where the debtor can settle within a reasonable period, is reasonably certain to be able to settle when called upon, and is expected to settle. A receivable from a shareholder can also qualify where the company intends to pay a linked distribution to that shareholder by offsetting it.

What does “readily convertible to cash” require?

Paragraph 3.12 sets three conditions. A value must be determinable at which a transaction could occur at that date, in the asset’s current state, without negotiation or marketing. The inputs to that value, such as prices and rates, must be observable. And the company’s own circumstances must not prevent immediate conversion, for example because it would have to curtail its operations or sell on adverse terms.

Section 4 of the guidance applies this to common assets. Paragraph 4.13 says none of an increase in fair value of investment property is readily convertible to cash, because marketing or negotiation would be needed, unless that process is complete and legal completion follows shortly after. Paragraph 4.10A says fair value gains on unquoted equity investments under FRS 102 are likely to be unrealised for the same reason. ICAEW’s introduction to the law on dividends says valuation gains on quoted shares would pass the test, as most likely would those on a straightforward interest rate swap.

How are losses and tax treated?

The guidance is asymmetric. Paragraph 3.10 says losses are realised unless the law, accounting standards or the guidance say otherwise. The exceptions in paragraph 3.10A are narrow: revaluation provisions under section 841(3), some downward revaluations, certain fair value losses meeting two tests, and deferred tax on an unrealised profit.

For tax, paragraph 3.16 treats a current tax charge as a realised loss even if it arises on an unrealised profit, because it is a sum payable in cash. Paragraph 3.17 treats deferred tax provisions as realised losses unless they relate to an unrealised profit, such as a revaluation surplus, in which case they reduce that unrealised profit instead. The accounting side is in deferred tax under FRS 102.

What is the linkage principle?

Paragraph 3.5 says transactions should not be looked at in isolation. A realised profit arises only where the overall commercial effect on the company meets the definition. Paragraph 3.5A says a group or series of transactions should be viewed as a whole, particularly if artificial, linked or circular, and that this is especially relevant to intra group transactions.

The guidance limits the principle as well. Paragraph 3.45 says that for two transactions to be linked, the second must have been contemplated when the first was entered into. Paragraph 3.65 says transactions are not linked merely because they are pre planned, although pre planning may be evidence of linkage, and normal commercial transactions in the ordinary course of business are not treated as linked. Section 9 applies linkage to group cases: for example, a dividend a subsidiary pays to its parent is not a realised profit for the parent if the parent reinvests the money in the subsidiary as a share subscription or a capital contribution in linked circumstances (paragraph 9.19). See intra group transfers at undervalue and capital contributions.

How does part realisation work?

Where consideration is partly qualifying and partly not, paragraph 3.18 limits the realised profit to the qualifying part, which the guidance calls “top slicing”. Its own example: an asset with a depreciated historical cost of £5m is sold for consideration worth £10m, made up of £4m cash and freehold property worth £6m. The total gain is £5m, but only £4m is realised. Paragraph 3.18A adds that any liabilities taken on are deducted from the qualifying consideration first.

Is the regime about to change?

Possibly. On 7 September 2026 the government published a consultation on modernising corporate reporting, open until 30 November 2026. It says the government is considering moving from the current dividend regime to a solvency based regime, which would be a fundamental change to the Companies Act 2006. Companies would instead state that paying the dividend will not affect the company’s ability to continue as a going concern. Question 16 asks whether respondents support this. Until any change is made, sections 830 and 853 and TECH 02/17BL continue to apply.

What mistakes come up?

  • Treating every credit in the profit and loss reserve as realised, including investment property and unquoted share fair value gains.
  • Counting an intra group receivable with no realistic prospect of settlement as qualifying consideration.
  • Ignoring the tax charge on unrealised gains, which is still a realised loss.
  • Looking at each step of a circular group funding plan separately.
  • Assuming that because a balance appears in “retained earnings” the directors need not analyse it. Paragraph 2.16 says companies should keep records to tell distributable from non distributable profits.

Getting it wrong can make a dividend unlawful, with the consequences set out in director liability for unlawful dividends.

Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant’s fees with Solar Protect. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.