The amendments to FRS 102 that were made and issued as part of the FRC Triennial Review almost two years ago, in December 2017, must now be adopted and put into practice.
The changes could be early adopted as far back as 1 January 2018 and in the case of directors’ loans to a ‘small’ company, from 8 May 2017.
The more significant changes are outlined below and have to be applied for accounting periods commencing from 1 January 2019, for years ended 31 December 2019 – so the clock is ticking to catch up with the rules.
Summary of the key changes
Directors’ loans: For ‘small’ entities, loans from a director or from a director’s group of close family members may be measured at transaction price, provided that the group of persons contains at least one shareholder in the entity receiving the loan. Therefore, the amortisation of long-term Directors’ loans that were previously amortised, can now be reversed.
This simplification is wider than the interim relief that was issued on 8 May 2017 and was given after representations from various professional bodies. The 2017 relief only permitted the simpler treatment if the director was a shareholder. Note that loans from a ‘small’ company to a director do not come within this exemption.
Investment properties: The ‘undue cost or effort’ exemption is gone, meaning that investment properties must now be measured at fair value. For investment properties rented to other group entities, an accounting policy choice is introduced between measurement at cost or fair value. See the application of this choice in our Investment Property web seminar here.
Intangible assets acquired in business combinations: New criteria have been introduced for recognising intangible assets separately from goodwill. This means fewer intangibles are required to be recognised separately. However, recognition is permitted if it is felt to be providing useful information and provided it is done consistently for that class of intangible and for all business combinations.
Basic financial instruments: A principles-based description of a basic financial instrument has been introduced to support the detailed conditions currently specified. This will allow a small number of financial instruments to be considered as basic, even though they may breach the detailed criteria, allowing them to be measured at amortised cost.
For more practical advice and examples on FRS 102 and the Triennial Review Amendments see our webinar here called FRS 102 – the New Regime from 1 January 2019.
The webinar will look at:
- Directors’ loans – ‘small’ entities, relaxation of some of the amortisation requirements;
- Intangibles in a business combination;
- Investment property rented within a group;
- Classification of certain financial instruments;
- Definition of financial institution; and the
- Reconciliation of net debt in statement of cash flows.
To purchase our latest June 2019 AML Manual for only €150+VAT click here and the accompanying AML webinar for €45 on the latest 2018 AML legislation click here.
Revaluation gains on tangible fixed assets go through the Profit & Loss Account. True or False? The answer is ‘False’.
To find out where revaluation gains on tangible fixed assets are presented, see our webinar called ‘Common Errors in FRS 102 Accounting’ where you may download the slides and support materials, all for just €45. On successful completion, receive a CPD certificate for your newly acquired knowledge. Well done!
The webinar, is 51 minutes long, and may be viewed anytime for up to a year from date of purchase, covers the following key areas, among others:
- Directors’ loans – the new rules on amortisation since 1 January 2019;
- Investment property revaluations;
- Statement of Changes in Equity (SoCE);
- Tangible fixed assets revaluations;
- Depreciation not charged;
- Going concern and break-up;
- Deferred tax gone missing;
- Areas of judgement and estimation uncertainty;
- Turnover accounting policy;
- Stocks/inventory accounting policy; and
- Disclosing the functional currency.
There are 18 other webinars on various topics – also for €45 each, or you may purchase two at the same time for €80 or five for €190.
All our webinars are accessible at any time (for 12 months from date of purchase) here.
We have also prepared, ready to use, several engagement and representation letter templates (in Word format) for many types of assignment, which help reduce misunderstandings about engagement scope and liability. These are available to purchase online (bulk purchases of 5 or more templates attract a 20% discount), please click on the relevant links.
Our latest additions may be of interest to you:
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.
Groups, stand alone companies and company directors may have, in the past, relied on informal arrangements and verbal agreements. They may now wish, as a result of the rule changes in FRS 102, to introduce more formal documentation to ensure their intentions are reflected in the contractual terms and in the accounting, so as to reduce any unintended consequences of these loans.
This latest blog in our series on the new accounting standard FRS102 considers the impact of its rules on an area that will impact most SMEs, namely, the accounting treatment for intercompany and directors’ loans.
This standard will impactnearly all privateentitiesinonewayoranother, fom 1 January 2015 and this particular topic of inter-company and directors’ loans will prove to be one of the most tortuous to explain to clients.
It is quite common for groups to manage their finances by setting up loans between parent and subsidiaries, or directly between subsidiaries. Many private companies in Ireland are owner-managed and long term loans between many company directors and their companies are very common.
These arrangements are mainly for commercial reasons and often allow cash to be used where it is most needed and may well be cheaper than using external finance, especially if the entity receiving the loan is perceived as risky so that the rate it could borrow at externally would normally be higher.
Often, though, the loans are not on any documented commercial terms. Perhaps they bear a low interest rate or more often no specified interest rate and no set repayment terms. This lack of formality in their repayment arrangements and these non-commercial aspects of intra group and directors’ loans can have ‘interesting‘ accounting consequences under trong>FRS102.
Inter company loans, like all financial assets and liabilities, are within the scope of either Section 11 (‘Basic Financial Instruments’) or section 12 (‘Other Financial Instruments Issues’) of FRS 102. Most are likely to be in Section 11, being debt instruments .Most loans to and from subsidiaries that are repayable on demand are explicitly listed in section 11 as likely to fall within its scope.
These basic instruments are initially measured at ‘the present value of the future payments discounted at a market rate of interest for a similar debt instrument’. After this initial recognition they are measured at amortised cost using the effective interest method, which means an interest charge is recognised systematically over the life of the loan, giving a constant rate of return.
When a company adopts FRS102 for the first time, it must assess all of its accounting policies and ensure that the assets and liabilities on its transition date balance sheet (i.e. in most cases 1 January 2014) are measured in accordance with the standard (except where there are specific exemptions). The amortised cost method will, in most cases, cause interest charges/income to be recognised in spite of the absence of cashflows.
Where zero-coupon loans have previously been held, unadjusted, at their face value, the balances will need to be revisited to re-present them using the amortised cost rules in FRS102.
Let’s take the example of Director A, a director of a Company B, a private company, which adopts FRS 102 in its December 2015 accounts and, therefore, has a 1 January 2014 transition date.
Let’s assume that at the beginning of 2012, B took a €100,000 interest free loan from A, its director, with a five-year fixed term. Assuming it can determine that a market rate of interest at the time would have been 12%. It goes back to the inception date in 2012 to establish what the accounting would have been from the outset. The revised presentation of the loan in the accounts under FRS 102 would be as follows:
|Interest at 12%
The 2013 closing value of €71,178 will be used as the carrying value of the liability in the transition date balance sheet at 1 January 2014, and the accounting continues from there.
FRS 102 is silent about the treatment of the difference of €28,822, According to the book ‘Manual of Accounting – New UK GAAP’ published by PwC in November 2013, (page 11014) states: “…in practice Director A would simply recognise the additional amount as part of the cost of investment in entity B…” Similarly B would recognise the loan liability at €71,718 and record the difference of €28,822 in equity as a capital contribution from the Director.
These numbers would of course, need re-adjustment as the discounted loan unwinds coming closer to maturity.
Few clients will find these accounting rule changes understandable or worthwhile. One response that is likely to be seen in practice is to ensure that there is documentation of all intercompany and director loans to include a term stating that they are ‘repayable on demand’, since section 12 of FRS 102 makes it clear that the fair value of an amount repayable on demand is not less than its face value.
Choosing to include this term, though, does mean that the receiving entity (‘B’ in this example) must show the whole loan amount as a current liability, which could damage the appearance of its balance sheet and thus hamper its ability to raise external finance in the future.
If a loan does not specify any terms, the default would normally be to assume it is repayable on demand, since the borrower has no enforceable right to avoid repaying the money.
Groups and company directors that have in the past relied on informal arrangements and verbal agreements may wish, then, to introduce more formal documentation to ensure their intentions are reflected in the contractual terms and in the accounting, and to help avoid any unintended negative consequences of these loan arrangements.
Relate Software Seminars – 2 – 4 December 2014
Meet John at the Relate Software Seminars taking place in Dublin, Galway and Cork on 2, 3 and 4 December respectively to hear more about this topic. Bookings with Relate at http://relatesoftware.selltickets365.com/
John McCarthy Consulting Seminars 15 and 17 December 2014
Some FRS 102 courses are taking place in Dublin on 15 and 17 December 2014, presented by John McCarthy, using journal entries to show how to prepare the first transition adjustments and the first set of FRS 102 financial statements.
- Camden Court Hotel, 15 December 2014 https://www.eventbrite.ie/e/frs-102-the-journal-entries-dublin-city-tickets-14533001599
- Red Cow Moran Hotel, 17 December 2014 https://www.eventbrite.ie/e/frs-102-the-journal-entries-dublin-red-cow-tickets-14532855161
NEW – FRS 102 Transition Checklist
This comprehensive FRS 102 Transition Checklist pdf publication will be available shortly for €50/ £40 + VAT . It will help users flag and address the issues that will arise on transition to the new accounting standard, which is effective for accounting periods commencing 1 January 2015 and will require the comparatives aligned with FRS 102 from the transition date which for December year ends is 1 January 2014. Watch for our upcoming blog announcing this publication.
John McCarthy FCA, Dip. IFRS, Dip. Insolvency, Certificate in Irish and UK GAAP is Director of John McCarthy Consulting Limited.
He offers consulting and training services to the accounting profession on audit, accounting, insolvency and practice management issues.