Audit and Technical Partner Leavitt Walmsley Associates Ltd
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Directors Loan Accounts: Disclosure Issues

6th Jan 2011
Audit and Technical Partner Leavitt Walmsley Associates Ltd
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The implementation of the Companies Act 2006 (CA 06) and specifically Section 413 has not been short of controversy since its arrival.

This area of the Companies Act has been extremely poorly drafted and there seems to be an understandable amount of confusion concerning the disclosure requirements contained within Section 413. 

This article will look at the issue concerning loans to directors, specifically for companies who apply FRSSE and offer a possible ‘common sense’ approach to disclosure of advances to directors.

Section 197(1) of CA 06 does make a general prohibition on loans to directors and also related guarantees or provisions of security where the approval of the shareholders is not obtained. However, such approval is not required for ‘minor’ loans i.e. if the aggregate value of the transaction(s) does not exceed £10,000, and companies are not prohibited under CA 06 to make such loans.

If advances are made to directors which exceed £10,000 then member approval must be obtained which can be in the form of a board resolution.

Advances to Directors

The problem child is advances to directors and what to disclose. S413 requires the following details to be disclosed in respect of advances:

  1. its amount
  2. an indication of the interest rate
  3. its main conditions
  4. any amounts repaid

In addition, the notes to the financial statements must also disclose:

  • the total amounts stated in (1)
  • the total amounts stated in (4)

Disclosure is also required in respect of guarantees of any kind entered into by the company on behalf of the directors, which disclose:

  • the main terms
  • the amount of the maximum liability that may be incurred by the company (or its subsidiary)
  • any amount paid and any liability incurred by the company (or its subsidiary) for the purpose of fulfilling the guarantee (which must also include any loss incurred by reason of enforcement of the guarantee)

The disclosures in (1) to (4) are the most controversial and accountants (particularly those dealing with FRSSE companies) are confused as to how to make this disclosure. For clients who have overdrawn directors current accounts, making disclosure of each individual entry is considered ludicrous, and certainly clients whose loan accounts are overdrawn do not look favourably upon such disclosure.

This particular area of the Companies Act is anticipated to be amended because its drafting has not taken into consideration the onerous disclosure requirements which it currently compels to ensure the financial statements give a true and fair view.

Under the old 1985 Act, where a directors loan account was overdrawn it was sufficient to disclose the opening balance at the start of the period, the closing balance at the end of the period and the maximum balance outstanding during the period. Of course, this is no longer the case under S413 and those who are ‘for’ section 413 cite the fact that the company and the director are two distinct bodies and the directors should not be using the company bank account as if it were their own private bank account. Arguably this fact has some merit.

However, it would seem accountants in practice (indeed certainly those who I have met during lectures) want a more ‘common sense’ approach to dealing with such disclosure. One accountant who I met said one of their clients who had an overdrawn directors loan account made the disclosures look like a shopping list!

A possible solution

Financial statements must be prepared that give a true and fair view and this concept has always been (and always will be) the case. Auditors of companies who are mandated to have a statutory audit, or choose to have a statutory audit, will form an overall opinion as to whether the financial statements give a true and fair view, or not.

In a lot of cases, advances to directors consist of several items which make up an overdrawn balance as at the end of a reporting period. However, consider a company that simply makes a £50,000 advance to the director for the purpose of a house purchase. In this case, the related party disclosure could be as simple as:

During the period, the company made a short-term loan to Mr Director amounting to £50,000 for the purposes of a house purchase.  Interest at the rate of 7.5% per annum is payable half yearly and the loan is repayable on 31 December 20XX.

In cases where the directors loan account consists of several transactions, a possible solution could be to determine the materiality of advances and repayments; aggregate the immaterial transactions and disclose separately the material items, essentially using the following as a ‘template’ reconciliation:

  • Opening balance                                           X
  • Plus:
  • Loans made in the period (advances)     X
  • Private expenditure in the period           X       X           
  • Less:
  • Undrawn remuneration                        (X)
  • Loan repayments in the period             (X)
  • Dividends declared in the period           (X)     (X)
  • Closing balance                                              X

Where items of expenditure or repayment are considered to be material to the financial statements, or are dissimilar in terms of those expenses which have been aggregated then these should be disclosed separately as a note. It might also be worthwhile disclosing the maximum amounts which were overdrawn during the year. Whatever disclosure is made in the full financial statements must also be made in the abbreviated financial statements given that this is a Companies Act requirement. 

Audited financial statements

If financial statements are audited and the directors loan accounts are overdrawn, the auditors must be satisfied that the disclosure contained within the financial statements give a true and fair view, so the above ‘template’ is persuasive rather than prescriptive. 

Credit balances and withdrawals

Indeed, any withdrawals made by the director from bona fide credit balances on their loan accounts cannot be constituted as an ‘advance’ because these are simply repayments of funds previously invested in the company by the director and should not be treated as an advance. 


The poorly drafted S 413 has brought a significant amount of controversy (and confusion), and indeed may have aggrieved some clients of practitioners where they have disclosed each and every transaction that results in an overdrawn position at the end of a reporting period. I am sure a common sense approach would be welcomed by practitioners and it would be interesting to hear of others’ views on how they have applied the provisions in S 413 since the implementation of CA 06.

Steve Collings is the audit and technical partner at Leavitt Walmsley Associates Ltd. He is also the author of ‘The Interpretation and Application of International Standards on Auditing’ (published February 2011) and lectures on financial reporting and auditing issues.

Replies (7)

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By Stephanie Henshaw
12th Jan 2011 10:54

Advances to directors

A good practical summary of the issues and ways of dealing with it. A few other thoughts:

1. It can be tricky to "template" disclosures because client circumstances vary so much so do think about the most significant aspects of what the client did.

2. The point about drawing against a loan account in credit is a good one - the transactions are not advances to directors - but they might be related party transactions and we still have to disclose names, status and details of  in the full accounts, so don't just ignore them or assume that an extra line in the Creditors' note will do, because it won't;

3. If a company makes advances to a director personally and the aggregate exceeds £10k at any time there is a legal requirement for the advance that takes the total over £10k to be approved by the members' before it takes place. Most small companies won't know about that unless someone tells them but failure to follow procedure could cause problems if there is a fall out between shareholders (divorce?) or the company goes bust.

Finally, remember that clearing the overdrawn balance before the year end does not mean we can leave out the disclosure. The existence of an advance or overdrawn current account at any time during the year triggers disclosure. Practice Inspectors from all the accountancy bodies regularly find examples of accounts where this simple rule has been overlooked.

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By The Black Knight
12th Jan 2011 10:55

excellent article.and quite right.

but: a bit difficult to convince the client that they need to pay extra for this extra work when companies house and HMRC are quite happy to accept any old rubbish for filing, including : accounts with no comparatives, no accounting policies, normal accounting treatment not applied, and worse, some do not even balance, and thats before you discover the numbers are a complete fabrication as well.

It appears the only people concerned with these rules are our professional bodies.

Am I the only one who spends his day's argueing the correct treatment ? When the authorities are not really concerned ?

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By ksagroup
15th Jan 2015 11:47

Loan accounts and directors drawings in an insolvency situation

A further problem that often arises is that loans are used to account for drawings taken by directors in lieu of salary/dividends. This can be a tax effective method of dealing with drawings where a copy reports profits and has distributable reserves. In lean times, it needs to be borne in mind by directors that drawings are usually taken regularly throughout the year whereas dividends are declared in arrears when the annual accounts are prepared. Should the company enter insolvency, this will result in the directors being personally liable for any loans that have been taken in anticipation of future dividends being declared.  We have some guidelines on overdrawn directors current accounts on our website.

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By mark.mcmillanrose
12th Jan 2011 14:46

Kalden's point

I agree that Companies House do not check and they quote "We rely on the information being accurate".  This quote came from a conversation I had informing them that they had accepted a set of accounts that should have been audited.  The company is question was known to me and they had taken advise from an unqualified that Companies House do not check.  How right that person was!  No doubt the fees were much less.  However on we plod, following all the small points to such detail, in order to keep those that make the rules in employment.

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By The Black Knight
12th Jan 2011 15:57

sounds about right !

another voice in the darkness !

We have also seen audit reports by unqualifieds on accounts that neither had or needed an audit.

These are the basic bits, you can just imagine what the tax advice includes or doesn't.

s414 ?

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By chancewind
12th Jan 2011 16:04

directors loan accounts discolsure issues

I have a ltd company client with husband and wife directors and sole shareholders, overdrawn dla at year end of 6,000 with no split of what is owed by each director, can you deal with this as one account or must you split it in two for disclosurer.  Would you have to charge interest as it is over £5000 if there is only one account but two directors owing it?  Would you have to show this as two accounts on the notes to the accounts

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By farrcorfe
13th Jan 2011 13:26


Good points all. And you should see the amount of rubbish advice and presentation that gets churned out by quite a number of members of the professional bodies, as well - mostly timeservers, of course, who are not at all proactive when dealing with their clients.


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