FRS 102: Ending confusion about non-distributable profits

By Alan Gregory | 14th May 2019 | 9 min read

FRS 102 - The Financial Reporting Standard applicable in the UK and Republic of Ireland - is becoming more established among practitioners.

The Financial Reporting Council has recently published some staff factsheets, which can be downloaded free of charge from its website ( These aim to provide additional guidance in certain areas of the standard.  However, the factsheets are not designed to be a replacement for reading the standard.

One area which has caused an element of confusion is the treatment of fair value gains on investment property.  The accounting treatment for investment property has been the subject of a separate article.  However, fair value gains are one of several types of gain which give rise to non-distributable profit.

Generally, profit is distributable in company law when it is realised (as defined in TECH 02/17BL, para 3.9).  In the context of fair value gains, TECH 02/17BL, para 3.9(c) would regard the gain as a realised gain when that gain is readily convertible to cash.  In most instances, fair value gains on investment property would be unrealised because they would not be readily convertible to cash as investment property would need to be marketed in order to sell the property. 

FRS 102 (March 2018), para 16.7 requires fair value gains (and losses) to be reported in profit or loss.  Deferred tax should also be recognised in respect of the gain or loss via profit and loss using the tax rates and allowances, which apply to the sale of the asset (FRS 102, para 29.16).  Where the entity has, for example, experienced a fair value gain on the property, the gain, net of the associated deferred tax liability, will be reported in profit or loss but would be an unrealised gain, hence non-distributable.

Neither accounting standards, nor company law, require non-distributable profits to be ‘ring-fenced’ in the balance sheet.  However, ring-fencing such profits can be advisable in situations where the company has a low level of distributable profits because shareholders tend to extract the profits in the form of dividends. 

One way of ring-fencing non-distributable profit in an attempt to ensure that they do not get distributed inappropriately is to do a movement on reserves to segregate non-distributable profits from distributable profits. 

IRIS accounts production has a ‘fair value reserve’ in the ELTD chart at account 974 with various sub-accounts.  This is where such non-distributable profits can be ring-fenced to ensure they are kept separate.

Where the fair value reserve only consists of non-distributable profits (e.g. it is only used to ring-fence fair value gains and losses on investment property under FRS 102), then it should be renamed a ‘Non-distributable reserve’.  Certain professional bodies are not advising member firms to name the reserve the ‘Fair value reserve’ on the basis that such a reserve can also include distributable reserves for certain transactions. 


Choy Industries Co Ltd has an investment property on its balance sheet as at 31 July 2018 with a carrying amount of £200,000 and an associated non-distributable reserve of £46,000.  On 31 July 2019, the fair value of the investment property was £220,000 and the company calculates deferred tax at a rate of 17%.

The entries in the financial statements of the company as at 31 July 2019 are:


Dr Investment property (Code 563/5)                                                20,000

Cr Fair value gain (Code 373/4))                                                       20,000

Being increase in fair value at 31 July 2019

Dr Deferred tax expense (Code 450)                                                  3,400

Cr Deferred tax provision (Code 931/3)                                             3,400

Being increase in deferred tax provision re gain

A movement on reserves journal will be needed to transfer the gain (net of deferred tax) from retained earnings to the non-distributable reserve account as follows:


Dr Retained earnings (968/relevant sub-account)                             16,600

Cr Non-distributable reserve (974/relevant sub-account)                 16,600

Being reserves transfer of non-distributable gain


Dr Investment property (Code 563/5)                                          20,000
Cr Fair value gain (Code 373/4))                                             20,000