The Effects of Applying the ELI Recommendations for Corporate Sustainability: Illustrative Examples

Abstract

In the last two decades new forms of distributions to shareholders such as share buybacks have found their way in standard dividend distribution policies of companies. Also, accounting rules have evolved and refer nowadays more to fair value consideration (for example in IFRS) which leads to an increased recognition of unrealised profits in distributable profits. The European Law Institute (ELI) recommendations (Biondi, Yuri, Colin Haslam and Corrado Malberti. 2025. “ELI Guidance on Company Capital and Financial Accounting for Corporate Sustainability.” Accounting, Economics, and Law: A Convivium 15 (s1): s21–88.) propose to modernise European company law regarding distributions, equity capital maintenance, and non-distributable reserves. The aim of the ELI recommendations is to ensure that payments made to shareholders, primarily in the form of dividends but also share buybacks, do not worsen the financial situation of companies and, therefore, endanger their continuity and resilience through time and circumstances, undermining their long-term capacity to cope with social and environmental commitments. We provide illustrative examples for eight ELI recommendations: restricting the dividend distribution of share premiums, stricter legal reserve requirements, the setting up of non-distributable reserves for gains from certain accounting measurements, for current value measurement of provisions, for capitalized development costs, for equity method holding gains, for held own-shares, and for goodwill. Our numerical examples show how the application of the ELI recommendations limits distributable profits and, therefore, contributes to sustain a sound financial situation of companies.