Directors’ loans to small companies – FRS 102 rules eased

11 May 2017

FRED 67, which proposes amendments to FRS 102, was published for comment in March 2017. The proposals include a relaxation of the existing requirements that apply to some loans made by director/shareholders to small companies. Many small entities are likely to find the new approach attractive and they might wish to adopt the changes early. This article sets out whether, and in what circumstances, this may be possible.

Existing rules

Under the current rules in FRS 102, loans that are treated as ‘financing transactions’ (ie ones where payment terms are deferred beyond normal business terms or which are financed at a rate of interest that is not a market rate) must be recognised at the present value of the contracted future cash payments, calculated using a market rate of interest for a similar debt instrument. These rules are often of particular relevance to interest free or low interest term loans that are made to companies by their shareholders.

New measurement option

FRED 67 includes a proposal to permit a small entity to measure 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, rather than present value. Subsequently, that loan will be measured at amortised cost calculated using that initial recognition date transaction price.

In Business Edge November 2014 we explained a tax issue that could have arisen for some small companies on adoption of FRS 102. This amendment will allow many affected companies to avoid this problem but FRED 67’s implementation timetable would mean that the changes become available too late to help entities that will have to apply FRS 102 to financial periods ending on 31 December 2016 and for several months thereafter.

Interim measure

In order to address this short-term inequality, the FRC has announced an interim measure which allows the new measurement option to be adopted prior to the finalisation of the FRED 67 changes. This interim measure is optional, available for immediate use and may be applied retrospectively (ie it can be used in the preparation of any FRS 102 financial statements that have not yet been finalised). It will, however, be deleted and replaced with permanent requirements after the FRC has considered the outcome of the FRED 67 consultation process.

It is important to note that this interim measure is very narrow in scope. It only applies to small entities and may be used only for loans that are received from (or made by) the specified individuals. For example, it would not apply to a loan made between two companies in a small group, even if the loan was passing down funds that originated from a shareholder/director of the parent company.

The deadline for responses to FRED 67 is 30 June 2017.

For help and advice on FRS 102 please contact Richard Matthews.

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