Severn Trent Water "It's all perfectly legal"

[motorbiking]

So the allegation is an unlawful dividend? Breach of Companies Act etc?

 

[JohnD]

So the allegation is an unlawful dividend? Breach of Companies Act etc?

Who made that allegation?

 

[transam]

Is it owned by foreigners ? Major share holders ?

 

[motorbiking]

Who made that allegation?

see post no 2.

You stated they had paid out more than they had coming in.

 

[denso13]

You stated they had paid out more than they had coming in.

The BBC stated it, amongst others

 

[JohnD]

So the allegation is an unlawful dividend? Breach of Companies Act etc?

You mean you made it up yourself?

 

[motorbiking]

Do you know what a question mark means?

It means I was asking a question.

 

[Audit Geek]

"One of England's top-rated water companies is using an accounting trick to artificially inflate its balance sheet by more than a billion pounds, BBC Panorama has discovered.

Severn Trent Water claims that an investment is worth £1.68bn in its accounts, when in reality it has no value to the overall business."

Major water company uses accounting trick to inflate balance sheet by £1.68bn

A substantial Severn Trent Water investment is based on IOU notes - BBC Panorama finds.

www.bbc.co.uk

"The complex accounting trick started in March 2017 when a shell company, with no money or assets, called Severn Trent Trimpley was set up as part of the group. Another Severn Trent company called Severn Trent Draycote - which owns the water company - agreed to buy Trimpley for £2.

Trimpley then issued additional shares and Draycote bought them for a staggering £3bn.
No money actually changed hands, however, as Draycote paid Trimpley with a £3bn loan note - effectively an IOU. But, on paper, Trimpley immediately appeared to be worth £3bn because it had the IOU.

Severn Trent Water then acquired 49% of Trimpley - and that investment was valued in the water company's accounts at £1.47bn. A hugely valuable asset appears to have been created for Severn Trent Water out of thin air."

 

[Audit Geek]

Chat GPT thinks using this kind of revaluation of a subsidiary to bolster a parent company’s profits (if the dividends paid to shareholders in excess of group consolidated profits did come out of this gain), ) is not permissible under International Financial Reporting Standards —

In the UK, under **International Financial Reporting Standards (IFRS)** or **UK GAAP**, the scenario you describe involves specific rules governing intercompany transactions, revaluations, and profit recognition. The parent company cannot legitimately recognize a capital gain in its profit and loss (P&L) account in such a case, and here’s why:

---

### **1. Intercompany Transactions and Consolidation Rules**
- **Consolidation Eliminations**: When preparing consolidated financial statements, intercompany transactions (e.g., IOUs, loans, or revaluations) between subsidiaries are eliminated. This means that any "gain" arising from an IOU issued by one subsidiary to another would not affect the consolidated financials.
- **Example**: If Subsidiary A issues an IOU to Subsidiary B, the parent company’s consolidated balance sheet would remove the asset (the IOU) and liability (the payable) to prevent artificial inflation of the group’s assets or equity.

---

### **2. Revaluation of Subsidiaries**
- **Individual Financial Statements**: In the parent company’s individual accounts, it can revalue investments in subsidiaries using the **fair value model** (IFRS 9 or UK equivalents) if the subsidiaries are classified as financial instruments.
- **Substance over Form**: If the revaluation stems purely from intercompany activity (e.g., an IOU issued by one subsidiary to another), this is not considered a genuine increase in value because no external transaction has occurred.
- The revaluation must reflect market conditions or genuine increases in the subsidiary's intrinsic value, not artificial gains from internal arrangements.

---

### **3. Profit Recognition (P&L Impact)**
- **Capital Gains on Investments**: Under IFRS and UK GAAP, unrealized gains from the revaluation of investments may be recognized in the parent’s **other comprehensive income (OCI)** rather than directly in the P&L account.
- Recognizing such a gain in the P&L would typically require evidence of realization (e.g., selling the subsidiary or receiving dividends).
- Intercompany IOUs do not qualify as a realized gain, as they do not involve external parties.

---

### **4. Related Party Transactions**
- **Transparency and Disclosures**: Intercompany IOUs and revaluations are classified as related-party transactions under IAS 24 (Related Party Disclosures). The parent company must disclose the nature and financial impact of such transactions, ensuring they are not used to misrepresent financial performance.
- **Fair Value and Arm’s Length Principles**: The revaluation must comply with fair value principles, which require the transaction to reflect market-based valuations, not internal adjustments.

---

### **5. Regulatory Safeguards Against Manipulation**
- **Auditing Standards**: External auditors would scrutinize such revaluations and gains, particularly if they appear to be artificially boosting profits or asset values.
- **Fraud and Misrepresentation**: Artificially inflating a subsidiary's value to recognize gains in the P&L could be considered misleading financial reporting, which violates both UK accounting standards and regulatory requirements (e.g., Companies Act 2006, FCA rules).

---

### **Conclusion**
In the UK, a parent company cannot legitimately revalue a subsidiary based on an IOU between subsidiaries and recognize a capital gain in its P&L account. While the parent might revalue its investment in the subsidiary in its individual accounts, such a revaluation must reflect genuine market conditions and typically affects **OCI**, not the P&L. Any attempt to artificially inflate profits through intercompany transactions would likely violate financial reporting standards and attract regulatory scrutiny.

 

[ellal]

In the UK, a parent company cannot legitimately revalue a subsidiary based on an IOU between subsidiaries and recognize a capital gain in its P&L account.

The UK government does that all the time...

For example the student loan debt is classed as an asset!

They charge an over inflated interest rate from day one whilst borrowing the money at a much lower non compound interest rate...

And the 'loan book' is run by private companies in order to improve public finances

 

[JohnD]

Do you know what a question mark means?

It means I was asking a question.

You mentioned an allegation. Who made that allegation? Or did you just made it up?

 

[Audit Geek]

The UK government does that all the time...

For example the student loan debt is classed as an asset!

They charge an over inflated interest rate from day one whilst borrowing the money at a much lower non compound interest rate...

And the 'loan book' is run by private companies in order to improve public finances

For example the student loan debt is classed as an asset…

But the student debt is an obligation to pay the government from outside, and not to itself. It also generates repayments which will reduce its size, especially if the threshold beyond which ex-students have to start repaying it gets frozen.

 

[noseall]

You mentioned an allegation. Who made that allegation? Or did you just made it up?

biking from the boatyard's grammar and comprehension (and law) are not amongst his strong points.

 

[motorbiking]

If there is no allegation of wrong doing we are left with 7trent saying it’s all perfectly legal and panorama saying it might be this or it might be that. Not very exciting news.

The reason I asked is because they seem to be saying dividends in excess of income were being paid which is not lawful.

Not hard to get your head round. I thought.

 

[Brigadier]

they seem to be saying dividends in excess of income were being paid

I read it as "in excess of [stated value]".