Mandatory Rules on Financial Situation, Dividends Distribution and Fair Value Accounting in the EU IRFS/IAS Regulation

Abstract

The objective of this work is to show that the financial situation of a company and its future evolution are legally relevant when the distribution of dividends are concerned and if the company wants to avoid - as an exception to the general rule - the application of fair value criteria. This I will argue is the case despite the fact that the EU has still not chosen to introduce a solvency test either as an alternative or as an additional system-to legal capital. The going concern principle as stated in Fourth Council Directive 78/660/EEC of 25 July 1978, and the financial information requested as part of the balance sheet by the EU Directive 51/2003, are the legal elements obliging the company to take into consideration the financial situation when the above mentioned decision is taken, in order to avoid liability for a decision which is inconsistent with the financial situation. The financial situation of the company is now particularly relevant for companies choosing to avoid the appliance of fair value criteria to financial instruments, as that choice presumes the ability to wait to sell that instrument on the market and that ability is very much dependent on the financial resources and the financial needs of the company.