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FRC issues FRS 102 amendment for directors’ loans

8th May 2017
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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. 


Replies (18)

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By johngroganjga
08th May 2017 18:59

But aren't nearly all such loans going to be repayable on demand anyway? So how much is this going to change in actual practice?

Thanks (10)
By carnmores
08th May 2017 19:36

writing down a loan from a director in a small company , bonkers standards again . why would they lend in the first place if it was to be written down and if it was later likely to be why not convert into loan notes or prefs. IMO this sort of nonsense is what really annoys us folk. if it is written down does it create a taxable amount?

Thanks (3)
Replying to carnmores:
By johngroganjga
09th May 2017 07:40

Yes I understand that the discount is taxable in year 1, but then of course it unwinds over the term of the loan so is tax neutral at the end of the day.

The point I was making is that 99% of loans from owner managers to their companies will be unstructured, therefore repayable on demand and so the requirement to discount etc. already does not apply.

Thanks (6)
By Ayesha Bham
09th May 2017 08:19

Not sure I agree with John's 99% here! Over the years I've seen a lot of small companies where a director has made a loan that has been formalised. Indeed we have at least 8 small company clients where they have chosen to formalise loan terms for their own purposes. We've also had a few other instances where loans have had terms in place and the company has early adopted FRS 102 because they are are now small under the new benchmarks. To me this change is quite helpful as we don't have to faff around discounting anymore. Thank heavens!

Thanks (1)
Replying to Ayesha Bham:
By johngroganjga
09th May 2017 11:02

It can't be for their own purposes - as such - can it? If the lenders control the company they will take repayment whenever they want, regardless of what any formal loan agreement says - for the simple reason that they are never going to sue themselves for not complying with the agreement they have made with themselves - are they?

Perhaps it suits them to do it for third party consumption - other lenders to show postponement etc.

Yes there will be some cases where external reasons dictate some type of formality, and even small companies with more than one shareholder may want formality if one is lending and the other isn't.

Thanks (1)
By Trethi Teg
09th May 2017 13:14

What a load of nonsense! Wonderful for those who get paid for creating these standards and perhaps enforcing them. Also wonderful for the large firms who can restate accounts under different accounting standards and thus justify even higher fees. Also good for those that want to pontificate on academic niceties.

For everyone else what difference does it make if the loans are discounted or not.

As accountants it is surely our role to use our time constructively for the benefit of our clients and not waste time buggering about carrying out needless tasks which in any event will be reversed in a few years time under Fred 2947!

Thanks (24)
Replying to Trethi Teg:
10th May 2017 10:04

Well said.

Thanks (0)
By youngloch
09th May 2017 15:53

What a breath of fresh air though - a public body listening and then responding in a common sense manner.

Thanks (3)
By Greenslades
10th May 2017 10:37

At last some common sense. Something that seems very rare in accounting standards bodies.
As one who remembers the 1970's debates over inflation accounting that came to nought it about time the majority of this standard was put in the rubbish bin where it belongs.

Thanks (3)
10th May 2017 10:46

The most important thing is that we don't have to waste time thinking about it any more - business as usual.

But why., oh why, didn't they get their act together on this sooner?

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By bluetone
10th May 2017 10:47

Does this apply to loans to directors as well as loans from directors?

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By Nick Graves
10th May 2017 10:55

It's high time all the bloody useless people who pontificate on these esoteric things were completely discounted...

I find it highly apposite that the acronym FRED has a slightly different meaning in the IT industry.

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All Paul Accountants in Leeds
By paulinleeds
10th May 2017 11:34

I welcome the changes. John says they are not relevant to 99%. I have a client with a 'long-term' directors' loan that would require discounting.

I have a few clients where the directors have financed major fixed assets e.g. property purchases and their loan has been outstanding for many year and can only be repaid on the sale of the property or alternative finance. The loan may be repayable on demand, however, that will NEVER happen and so I treat the loan as payable after one year., The Balance Sheet is therefore 'true and fair' in my opinion, matching long-term fixed assets with log-term loan. I would have had to deal with the nonsense of discounting, though in practice I'd just ignore it. Try and explain that rubbish to a small owner-managed client!

I've practised for 30 years and I think that I know what is true and fair. Why should some idiot committee decide over the last year or two that we now need to discount!

I'm glad common sense as prevailed.

Thanks (3)
By BryanS1958
11th May 2017 19:52

Sometimes I despair - don't people have better things to do with their time? We've had the new FRSs, MTD, etc whilst our beloved Institute, instead of challenging these ridiculous proposals, is far too busy designing a brand with a lady holding chopsticks.

Which muppets ever thought that things like calculating present values, renaming balance sheets and P & Ls and submitting tax returns 5-6 times a year was a good idea? They have obviously never been in business. I would anticipate that if i discussed these proposals/changes with 99% of my clients they would a) not have a clue what I was talking about b) be unable to see any point in the proposals/changes and c) wonder why professional and trade bodies were not doing more to minimise the amount of business administration and maximise business profits!

Thanks (6)
Replying to BryanS1958:
By bigmuggsy
10th May 2017 20:25

Exactly - I'd love some of these idiots to spend a week in my practice dealing with real world clients. They'd soon stop implementing these daft changes when seeing how real business works

Thanks (1)
By Tom 7000
10th May 2017 18:10

hot air... they are all current accounts

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By AndrewV12
15th Jun 2017 11:44

'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'

I am all for simplicity, Fred 67 appears to be something about nothing.

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By Jafer
15th Sep 2017 10:40

Dear Sirs,
I have a limited company, I am the shareholder 100% and I am the director, I have a UK Visa to invest in the UK, the visa condition is to loan my company at least £200,000 for five years, no condition on interest, but I decided to be interest free, I did an agreement between me as a lender and between the company as a borrower for 5 years.
I wonder if FRS102 new amendment affects on my loan or not, and if the company has to pay interest or not.
Please advise

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