Audit and Technical Partner Leavitt Walmsley Associates Ltd
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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.

18th Aug 2020
Audit and Technical Partner Leavitt Walmsley Associates Ltd
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company director; notepad in a boardroom
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This is often an area which poses a lot of questions and the law governing this area is to be found in section 413 of Companies Act 2006 (which johngroganjga pointed to).

The directors’ advances, credit and guarantees disclosure in UK GAAP derives from the requirements of company law. The requirements themselves are reflected in FRS 105, paras 6A.3 and 6A.4 (for UK micro-entities choosing to apply FRS 105) and paras 6B.19 to 6B.21 for Irish micro-entities.

Directors’ advances

An advance is effectively a payment to a director that creates, or increases, a debit balance on their current account (sometimes referred to as a ‘director’ loan account). An advance arises when the director becomes indebted to the company as can be seen in the following example.

Example

Lisa is a director of King Ltd. Details of her loan account for the year ended 31 March 2020 are as follows:

Opening balance at start of year (£10,000)
Withdrawal 1 £6,000
Withdrawal 2 £3,000
Withdrawal 3 £2,000
Withdrawal 4 £5,000
Dividend (£10,000)
Closing balance at end of year (£4,000)
Up to withdrawal 2, the director is merely withdrawing from her credit balance, so these withdrawals do not constitute an advance because her current account remains in credit. At withdrawal 3 the current account becomes £1,000 overdrawn (which is an advance) and at withdrawal 4 her current account is £6,000 overdrawn. The overdrawn balance is repaid following payment of the dividend of £10,000 returning her current account to £4,000 in hand. 

All advances are interest-free and are repayable on demand.

Section 413 of Companies Act 2006 would require disclosure as follows:

Director’s advances, credit and guaranteesDuring the year, the company made interest-free advances to a director amounting to £6,000 (2019: £X). These were repayable on demand.

The company received repayments of £6,000 (2019: £X).

You will note that s413 does not require the director’s name to be disclosed; nor is any disclosure of the director’s name required under FRS 105. The same also applies under FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, including small entities choosing to apply the presentation and disclosure requirements of Section 1A Small Entities

In the example above, if the opening balance on the director’s current account was £nil, then the advances would total £16,000 and the credit would be £10,000. As noted above, any withdrawals from a pre-existing credit balance are not advances.

Disclosure requirements

Section 413 of Companies Act 2006 requires the following to be disclosed in respect of an advance or credit:

(a) The amount(b) Indication of the interest rate

(c) Main conditions

(d) Amounts repaid 

Monetary amounts are required to be disclosed in respect of (a) and (d) above.

It should be noted that it does not matter if the opening and closing balances of the director’s current account was either £nil or in credit at the start and end of the year. If the current account becomes overdrawn at any point during the year (hence giving rise to an advance) the s413 disclosures are triggered. 

These requirements apply to anyone that was a director during the year. Therefore, even if a director resigned part-way through the year, advances and credits in their current account would still need to be disclosed.

Maximum amounts outstanding

There is no longer a requirement in company law to disclose the maximum amounts outstanding during the year. Some entities have chosen to do so and this would be permissible if the directors consider that making such disclosure results in a true and fair view being given. However, the vast majority of companies (particularly small companies) choose not to make this disclosure.

Replies (4)

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By Rgab1947
19th Aug 2020 09:59

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.

Thanks (1)
By cfield
19th Aug 2020 11:51

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.

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By Trethi Teg
20th Aug 2020 10:37

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.

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Replying to Trethi Teg:
By cfield
20th Aug 2020 10:57

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.

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