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Amortised cost
Whilst I can understand how this illustrates the method we "have" to adopt I completely don't agree with it at all. Steve I attended a course you were lecturing on a couple of weeks ago and expressed my frustration (admittedly a little too much for which I apologised) at you but I cannot for the life of me understand why we are being forced into this.
I stand by my defence in that my clients won't pay me to do this extra legwork so I am going to carry on regardless with what I have done for the last 30+ years. It's going to take inordinate amounts of time to even start recalculating these things.
Retirement cannot come quick enough.
Personally I agree completely with Ayesha.
This is just wasting time for little value. So a loan to a sub below market value is an increased investment in the sub. Really? So what if the group chairman gives some free advice to the staff at the team. Is that similarly an increased investment. No doubt step two will be to value free advice at market value and so strip out the value for the parents benefit without needing a dividend!
Many companies are manipulating their books through non-market interest but this is for major corporations who have cross border tax advantageous (if they can still use them!). Small groups won't want this and won't appreciate it. It is another layer of red tape on the small business.
I am minded to skip it or at least tell clients that only short term loans,frequently rolled over , should be used as it reduces market rate interest to (hopefully) whatever you charge. The taxman has always insisted on market rate anyway given the connected nature anyway.
Whatever next!
Problem is
When I questioned this with my professional body technical helpline they completely agreed with this treatment and went as far as saying that if we didn't comply with these standards we'd be producing negligent accounts.
I still say that it's wrong and there's nothing that should change for small companies. I'm thinking of resigning my professional body membership as we don't do any audits now and this whole FRS 102 lark is just another nail in the coffin.
Intra-group loans
Agree with all the comments. There is nothing in these requirements under FRS 102 that will provide SME owner/managers with information that will help them improve the performance of their businesses. What there is instead is confusion and additional cost. In other words the total opposite of what the owner/manager of an SME needs
frs102
Wasn't there supposed to be a reduced disclosure frs102 for small companies - less than £10.2m turnover and £5.1m assets? Would these provisions be excluded or included?
Blimey its complicated
There is a lot to take on board, just looking at the article, when i read the following, I cannot but think the seeds of the next Banking crisis have already been sown, I know the following have been around years, but just reading their names frightens me.
Section 12 deals with the more complex financial instruments including:
OptionsSwapsForward contractsFutures contractsLoans with complex features
FRS102
I agree with all the comments so far. A complete waste of time for 90% of all companies and 99.9% of SME's.
What are our professional bodies thinking about? For those of us old enough to remember the proposals on inflation accounting that ended going nowhere (after years of effort) this just looks like a bad dream that should have been consigned to the dustbin.
I concede there is a case for financial enterprises of significant size, but from contact with friends running modest financial institutions they are effectively now going to keep 2 sets of books .- one conventional set to run the business by in traditional format a second parallel set solely for reporting. Whoever put this together needs throwing out of their professional institute - its that bad!
Overdrawn director loan accounts
Has anyone thought about the implications in relation to overdrawn director loan account balances?
If we need to present value loans back under the new requirements, could this be a planning opportunityto help in reducing S455 liability going forward?
FRS 102
Completely agree with the earlier comments. I see that a lot of small companies currently using FRSSE will have to operate FRS 102 because they are above the Micro company threshold - simplification or what ?
It is just a load of twaddle (polite wording), and means absolutely nothing to sme owners, indeed they will just look at us as if we've lost our marbles - a loan of £50,000 to go on the accounts at say £48,999, or some other fictitious value; I'm sure that makes no sense to the client or to the bank or to HMRC.
No doubt some will say that it puts "real" value into the balance sheet, but it doesn't - because different people will use different discount rates, and no-one will consider inflation anyway.
I've tried explaining to one client who enters into forward currency contracts to fund the purchase of materials bought in US $, and explained how the accounts will have to reflect spot rates for the derivative contract at the year end instead of the contract rate - his expression was priceless !
Let us at least prepare accounts that the we, the client, the bank and the taxman understand.
Small clients
I totally agree - small clients are not going to know what's happened to us! not only that but they are not going to pay us! Will our professional bodies knock some money off our subs for all this extra work we are going to have to do because of their new rules. Hardly likely!
I am certainly not renewing my membership after this year and will continue preparing accounts that mean something to my clients! FRS 102? What's FRS 102?
Substance over form?
Steve makes the point that a loan technically repayable on demand should be carried at "cost" rather than fair value - an approach supported by ICAEW guidance. ICAEW go further, stating that where no repayment terms are set out, loans are to be treated as repayable on demand and classified as creditors due within one year. I foresee a significant number of loans being reclassified as due within one year once FRS 102 is adopted. Even where both parties know that the loan will still be outstanding in 12 months' time we are told that the correct classification is "due within one year", because legally the loan is repayable on demand.
However, FRS 102, para.2.8 firmly restates the concept of "substance over form". For many years we have happily brought leased assets onto the balance sheet knowing full well that the entity will never actually own them, because that reflected the substance of the transaction.
Now, however, we are told that a loan must be classified as "due within one year" because that is its legal form, even if its substance is something different. This is inconsistent at best. At worst, the results are misleading or meaningless.
So who decides what market interest rate is and how readily available is this information to perform the calculations? I have been searching for this information and the guidance is pretty vague. The hassle you have to go through to shop around market interest rate is unbelievable and an utter waste of time. Might as well just estimate a figure...which has a high probability of being wrong anyway!
Hi,
Just to reignite this one!
If a non EU company issued an interest free loan to a UK subsidiary (owns 75%) would the above treatment still apply?
Thanks
A company with two equal shareholders. One shareholder lends working capital but the other does not. Both shareholders agree an interest rate but agree that interest will be forward applied only in the event of winding up the company or one or other share buy outs. Question under FRS 102 need the forward interest be applied to Profit/Loss at the end of annual reporting periods in the interim?