The triennial review of FRS 102 has taken place and the FRC is proposing a number of changes.
This review takes into account stakeholder feedback on the implementation of FRS 102. Of particular interest are the proposed simplifications to accounting for directors’ loans for small companies.
Current accounting treatment Many small companies benefit from loans from the director/shareholder which:
are not repayable on demand
have either no interest/ very low rates of interest of interest charged.
The various versions of FRSSE which were traditionally used would simply account for these loans at the year-end balance at cost. So they might be treated as due within/after 12 months but the interest issue could be ignored.
FRS 102 had a requirement that, despite no interest being charged, the company still had to discount the loan from the director unless it was repayable on demand. The complicated instructions were included in the FRC staff education note 16 and included the suggestion that the difference created by the discounting would be an ‘additional investment’ in the company. This treatment has caused many problems for small entities who see it as wholly inappropriate. Consequently this has resulted in a number of calls to the ACCA Technical Advisory helpline.
Proposed accounting treatment The review has resulted in proposed changes to this contentious treatment and these are included in Financial Reporting Exposure Draft 67 (FRED 67) issued by the FRC.
The relevant changes in FRED 67 mean, for small entities, a more proportionate accounting solution for 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), which will permit the loan to be initially measured at transaction price rather than present value. Thus FRS 102 will no longer require an estimate to be made of a market rate of interest in order to discount the loan to present value.
The FRC aims to finalise the amendments in December 2017, with an effective date of accounting periods beginning on or after 1 January 2019. Early application will be permitted provided that all amendments are applied at the same time.
The proposed changes offer a sensible solution to small entities that receive non-interest-bearing loans from directors. However, the only disappointing element is the timeframe of the proposed changes which will leave small entities currently preparing accounts having to potentially account for the directors’ loans in a manner which is very likely to be changed in the near future.