The distribution of unrealised gains through fair value measurement : the Maltese scenario

Abstract

PURPOSE: This study sets out to (i) examine the extent of unrealised gains reported by Maltese Listed Entities (MLEs), (ii) explore Chief Financial Officers’ (CFOs’) perspectives on the treatment of unrealised gains under the Maltese Companies Act (MCA) and IFRS standards, including their views on key tests influencing dividend distributions, and (iii) investigate CFOs’ opinions on the potential revision of the MCA’s provisions regarding distributable profits and their implications for dividend policy. DESIGN: Initially, this study carried out a content analysis of the financial statements of all MLEs over the five-year period from 2019 to 2023. Subsequently, this study adopted a qualitative approach to collect primary data through semi-structured interviews with nine CFOs from MLEs. Furthermore, findings from such primary data were interpreted in relation to the literature to address the study’s objectives. FINDINGS: The study found that MLEs widely applied Fair Value (FV) measurement, resulting in unrealised gains most commonly reported from Investment Property, Land and Buildings, and Financial Assets. Additionally, the interviews revealed concerns over the lack of clarity in the MCA regarding realised and unrealised profits, while some noted inconsistencies with IFRS standards, which at times required external guidance. While certain CFOs supported revising the MCA to permit the distribution of unrealised FV gains, this support was conditional, depending on valuation reliability, cash availability, and strict regulatory frameworks. Furthermore, some CFOs cautioned that the illiquidity of key assets and the risk of overstatement in valuations could undermine financial stability. Overall, CFOs emphasised a cautious, cash-based approach to dividend policy, prioritising financial stability over accounting profit. CONCLUSION: Overall, the study highlights that the MCA has not kept up with developments in financial reporting, particularly regarding unrealised FV gains. As a result, CFOs expressed a need for clearer guidance and greater alignment between the MCA and IFRS standards to reduce inconsistencies and support more informed dividend decisions. VALUE: This study contributes to the body of literature on the use of FV within the local context. Moreover, it offers insights into CFOs’ perspectives on the distribution of unrealised gains and whether such distributions should be allowable in Malta. Lastly, it highlights the need for updates to the MCA, particularly to reflect developments in financial reporting since its enactment in 1995.