FRS 102 – Interim relief for Treatment of Directors’ Loans

FRS 102 – Interim relief for Treatment of Directors’ Loans

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.

The Proposed Companies (Accounting) Act 2016

The Proposed Companies (Accounting) Act 2016

The proposed Companies (Accounting), Act 2016 is expected to make some changes in Irish company law. These changes have been expected almost since the Companies Act 2014 became effective on 1 June 2015. Publication of this new company law has been delayed by the formation of the new Government. We understand that legislators are actively working on the new law at present.

We covered the new company law as well as its potential impact on current accounting practice in FRS 102 and with the proposed FRS 105 accounting standards, at our public seminar on Monday 27 June 2016 at the Talbot Hotel, Stillorgan, County Dublin. More seminas will take place in 2016 and 2017. see our CPD Courses page for details.

Among the changes expected in the new law are:

Increased thresholds for company sizes

The new Act will trigger an increase in the accounting disclosure thresholds for company sizes.  The existing size thresholds are shown in brackets.

  • Small Company – a turnover of €12m (€8.8m), 50 employees with a balance sheet of €6m (€4.4m);
  • Small Group – a turnover of €12m (€8.8m) net or €14.4m gross, 50 employees with a balance sheet of €6m (€4.4m) net or €7.2m gross. The reference to the term ‘gross’, is before taking account of any consolidation adjustments;
  • Medium Company – a turnover of €40m (€20m), 250 employees with a balance sheet of €20m (€10m).

Micro Companies and Directors Remuneration

One of the key features of the new Bill is that micro companies (those with turnover of less than €700,000, among other criteria) will be exempt from Sections 305 to 312 of the Companies Act, 2014 which require disclosure of directors’ remuneration and certain loan arrangements.

This is likely to appeal to many company directors who wish to keep their remuneration and loan arrangements private. Those companies classified as ‘small’ will still be required to disclose directors’ remuneration and loan details in their financial statements. Certain ineligible entities cannot be micro companies and these include financially regulated entities like investment intermediaries.

In addition, directors of micro companies will not have to a file director’s report.

Medium Sized companies

Medium sized companies will have to file full financial statements as Section 354 of CA 2014 will be deleted from Irish company law. At present they do not need to disclose certain matters including their turnover.

The commencement date of the new law is not yet certain and it remains to be seen what precise changes the law will introduce.