FRS 102 – Interim relief for Treatment of Directors’ Loans

by John McCarthy

On Monday 8 May 2017, the Financial Reporting Council (FRC) issued a press release on director’s loan reporting for small companies. It has announced that it is withdrawing the requirement to find a market rate of interest where a loan is made on an off-market basis under Irish GAAP. This is an unusual move for the FRC, as it is making the change without consultation, presumably on the basis of demand from the profession.

In March, the FRC published Financial Reporting Exposure Draft 67 (FRED 67) which set out changes to FRS 102 as a result of the first triennial review, outlining potential changes to be made to director’s loans accounting. We will cover the changes in this FRED in a future blog.

The FRC has now responded to calls to create an interim optional exemption for small companies, allowing them to measure a basic financial liability that is a director’s loan initially at transaction price.

The FRC Press Release states: ‘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.’

The measure announced applies to credit loans. The FRC has clarified that the interim measure will not apply to loans from small companies to their directors/shareholders i.e. debit loans.

As it is an interim measure, the amendment will be deleted as part of the finalisation of FRED 67, expected around January 2018. It will then be replaced with permanent requirements based on the proposal in FRED 67 after the outcome of the consultation process. The changes in FRED 67 are not expected to come into effect until periods commencing 1 January 2019, but early adoption may be allowed.

The FRC said: ‘Whilst it is usual for the FRC to consult formally on amendments to an extant standard, the FRC has concluded that this is not essential in this case as the amendment is only an interim measure, it merely defers for many entities the first-time application of an accounting policy of measuring such loans initially at present value and the permanent removal of this policy is already subject to an on going consultation.’

‘We have also explained that, in the context of owner-managed businesses in particular, many question the value of the notional interest charge to profit or loss in such circumstances, especially where the notes to the accounts adequately disclose the nature and terms of outstanding directors’ loans.’

For more on FRS 102 and the proposed changes in FRED 67 come to our next CPD course at the Talbot Hotel Stillorgan County Dublin on Monday 27 November.  For more details and online bookings see here.

 Other courses are also available at Ticket Tailor here.