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Treatment of directors loans and interest received/accrued

Accounting treatment

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Hi,

I'm an industry accountant with the best part of 20 years experience.

I've just taken a job as a business analyst and part of my job is to construct the budgets.

I need to make a few changes to the management accounts/budgets etc and there are a couple of things that stick out imidiately as being allocated/presented wrongly in the P&L....

Firstly, directors loans that are being re-paid monthly - these are currently treated as Directors Drawings in the P&L - obviously, this is a movement of cash rather than a distribution of profit and so shouldn't be shown in the P&L at all.

Secondly, Interest received and accrued interest received - this is currently being shown as turnover in the P&L.....I'm not comfortable with this on the basis that the interest is generated as an indirect consequence of trading (specifically, it's generated from holding client monies). I would prefer to treat this as a reduction of financing costs. The same also applies to credit card fees charged to clients.

 

In both cases, I'm looking for some kind of guidance or ruling that states the correct treatment. I've tried googling it but I can't seem to find anything specific in either case.

I need to convince the directors and I'm just wondering which standard(s) would deal with these?......basically I need a piece of paper to prove my approach or they may well be considered to be a matter of opinion. 

If anyone can point me in the right direction, that would be great.

thanks,

N

Replies (6)

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By lionofludesch
13th Jul 2016 11:27

Interest isn't turnover, I agree, but you can't net it off in the published accounts. If you want to do that purely for internal use, no problem.

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Replying to lionofludesch:
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By Numberwang
13th Jul 2016 11:34

Yes I agree, it obviously has its own place in the financial statements but in the management accounts I would simply show it in amongst finance costs.

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By Glenn Martin
13th Jul 2016 14:31

I think your suggestions are correct from an accounting reporting point of view, however I would ask/find out why they are currently reported as they are.

I do a lot of reporting for business people or "entrepeneurs" and many do not understand the reporting in Financial Statements so prefer reports presented in a way they understand.

Many are not interested in EBITDA etc but simply the things that matter to them. I have a client who wont accept depreciation in his monthly accounts as it distorts the figures, so it only goes in month 13 prior to the auditors coming out.

What you don't want to do is present your shiny new UK GAAP reported accounts for him to say " where the ****s my drawings gone".

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Replying to Glennzy:
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By Numberwang
13th Jul 2016 17:00

...exactly that.
I think I'm just going to have to educate some people - the trouble is, the previous person had very little knowledge of management reporting which is why things have got bent out of shape.
The trouble with having MI that's miles away from the financial statement is that a, you can't make comparisons with other companies and b, there will always be confusion as to why the financial statements are nothing like the MI and therefore get ignored interely.

The previous person has never presented a balance sheet or a cashflow statement - I think the inclusion of such reports should help to explain where the DLA payments go etc while at the same time keeping the accounts fairly 'standard'.

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By brian.barrett
13th Jul 2016 18:26

I agree that many directors do wish to see the income in a format that they can understand; and that whilst challenging their requirements should be done, ultimately they are the directors.
The main thing you have to avoid, or at least prepare directors for, is when the statutory accounts suddenly show a completely different profit, or loss when profit expected, to what the management accounts show.
Not mentioned but banking covenants could also be an issue if you are doing mgt accounts that differ substantially in GAAP than the statutory accounts.

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By tom123
13th Jul 2016 22:53

There's probably a middle way - personally I have reports that use a number of different classifications according to usage. I tend to use ODBC links to my data systems to refresh them all.

So long as the bottom line is the same in each, I don't really mind if things are grouped in similar ways.

And I can see an argument for showing directors repayments as a 'cost' for internal consumption - even though in reality you are paying down a creditor.

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