The Financial Reporting Council (FRC) today issued an amendment to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland - Amendment to FRS 102 (May 2017): Directors’ loans – optional interim relief for small entities.
This amendment is only available to small companies and relates to loans from a director who is also a shareholder of the business (or a loan from a close member of the family of the director-shareholder).
Why has the FRC issued this notice?
In March 2017 the FRC issued FRED 67 Draft Amendments to FRS 102 – Triennial Review 2017. This FRED proposes various amendments to FRS 102 as a means of simplifying the standard in certain areas and clarifying others.
FRED 67 is based on feedback received from preparers of financial statements under FRS 102, as well as implementation feedback received by the FRC. Should the proposals go through as drafted in FRED 67, the revisions to FRS 102 will apply for accounting periods starting on or after 1 January 2019.
One of the simplifications proposed in FRED 67 relates to the accounting treatment for a loan to a small company from a director-shareholder or a close family member of that director-shareholder.
FRED 67 proposes to permit such loans to be measured at transaction price rather than at present value, which would be calculated using a market rate of interest. The treatment of directors’ loans under FRS 102 has been controversial and the FRC has listened to feedback in this area - it is expected that today’s announcement will be broadly welcomed.
The proposals in FRED 67 are not expected to be finalised until the end of this year. As small companies are mandatorily required to apply FRS 102 for December 2016 year-ends onwards, this would have meant that a small company with a loan from a director-shareholder may have to discount that loan to present value for the 31 December 2016 year-end, only to then unwind the discount in the 31 December 2017 year-end financial statements. Later reporters would have been able to take advantage of the simplification on first-time adoption of FRS 102.
The FRC has recognised that this would be unduly arduous on a small company with a 31 December 2016 year-end and has issued an interim change to FRS 102 which effectively brings forward the simplification. Paragraph 1.15A is being inserted into FRS 102 as follows:
1.15A A small entity, as an exception to paragraph 11.13, may measure a basic financial liability that is a loan from a director who is a natural person and a shareholder in the small entity (or a close member of the family of that person) initially at transaction price. Subsequently, for the same financial liability, a small entity is also exempt from the final sentence of paragraph 11.14(a).
The above amendment is effective immediately and early-adoption is also available but cannot be applied directly (or by analogy) to any other transaction, event or condition.
Ordinarily, the FRC would formally consult on changes to FRS 102 (or indeed any other standard in the suite of UK GAAP). However, in this instance the FRC has concluded that this is not necessary as the amendment is only an interim measure, and it is expected that there will be widespread support for this amendment as it is a simplification for small companies.
In addition, the removal of the requirement to discount such loans to present value is already subject to an on-going consultation.