What are distributable reserves?
Definition of distributable reserves
Distributable reserves are also sometimes called distributable profits.
On a company’s balance sheet, the distributable reserves are normally calculated as the accumulated realised profits less the accumulated realised losses. ‘Accumulated’ because these include profits and losses carried over from previous years and ‘realised’ as the profit or loss must relate to actual physical income and costs, and must exclude such items as revaluation of a capital asset that the business still owns.
Distributable reserves may be paid out to shareholders as dividends, invested in new assets or held in the business’s accounts.
Limited companies can only legally pay dividends to shareholders if the dividends do not exceed the distributable reserves in the company. Additionally, the company cannot pay dividends if doing so would cause the company to owe more than it has resources to pay, i.e. if paying the dividends would render the company insolvent.