Directors’ advances under FRS 105
Steve Collings tackles an ‘Any Answers’ question which recently queried the disclosure requirements of directors’ advances under FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime.
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So the directors draw frequent amounts, always thinking its a dividend, but the paper work is non-existent or an email maybe if we are lucky but its a dividend in their minds when they draw.
So is disclosure still required?
I am sure we all have clients like that. Happy to do it but it seems a pointless exercise just eating up time which you may not be able to charge for.
Steve, thanks for a very informative article as usual. You say there is no obligation to disclose the maximum balance, but surely this is done anyway by default, as in your example. What balance would you report otherwise? Also, do we need to report the year end balance? In your example this was not necessary, but suppose the opening balance was nil. The advance would then have been £16k, the repayments £10k and the closing balance £6k. What would the disclosure have been then? Do we just leave it to the reader to subtract one figure from the other?
With a balance above £10k during the year, there would have had to be 2.5% interest to avoid a BIK, i.e. £150 under normal averaging if the first withdrawal was in Month 1 and the financial year was the same as the tax year. What would the disclosure have been for this if it was debited on 5 April but not yet paid (bearing in mind that interest cannot be paid by book entry unless the loan account is back in credit)?
Suppose the financial year was different to the tax year but the interest for the still current tax year had not been calculated yet. Would it need to be accrued and disclosed as unpaid? What if the debit balance was under £10k for the current tax year (up to the balance sheet date and since then too) so no interest was required for that part of the financial year. How would we disclose that, bearing in mind the 2.5% was only for part of the year? It would obviously be misleading to imply it was the rate on the loan for the whole period.
The Official Rate is now down to 2.25% from 6/4/20. How do we reflect such changes in the note?
One of the curiosities of FRS 105 is that these changes have to be shown on the face of the Balance Sheet (sorry, Statement of Financial Position in FRS new-speak). If it gets overlong, there won't be room under the the figures. It would have to go on the next page, almost like having a notes page!
These are the issues most of us grapple with on FRS 105 accounts (or should be grappling with). Perhaps you could give some guidance on this in a follow-up article.
Agree with previous response in as much as the article is well written and informative.
However the whole thing is as much use to those who rely upon company accounts for information as a detailed explanation of the breeding cycle of an Indonesian sitck insect.
There are very big gaps in the Companies Act and FRS's from the point of view of transparency for the outside world- the size of the Grand Canyon in scale but here we are talking about somehting which equates to a small ditch in Reading.
Keeps academics in work though and those accountants who prefer to pontificate on accounting standards rather than looking after thier client's real needs.
Yes but nobody wants to analyse small company accounts any more than they wish to know about Indonesian stick insects. That's why we have the reduced disclosure. It would be absurd to expect small companies to produce the same level of detail as public companies trading on the stock market.
It would also be unconscionable to impose that sort of a burden on them, a major deterrent to working through a company and impossible to police anyway without bringing back audits for all companies.
I agree FRS 105 is nowhere near as good as the FRSSE and the accounts are pretty much useless but that's what happens when politicians and bureaucrats meddle in things they don't understand.
Anyone selling to a small company or lending it money would be well advised to do their own due diligence rather than relying on accounts. However good they are, they can never be more than a history lesson.