Director's loans – new exemption on valuing loans at market price

Financial Reporting Exposure Draft (FRED) 67 proposes a number of amendments to FRS 102, in response to calls from stakeholders, intended to simplify it and make it more cost-effective. This includes permitting small entities to initially measure a loan from a director who is a natural person (a natural person is a person that is an individual human being as opposed to a legal person, which may be a private or public organisation) and a shareholder in the small entity (or a close member of the family of that person) at transaction price. 

These changes were published in FRED 67 (by the Financial Reporting Council (FRC) in March 2017) which the FRC propose to make effective from 1 January 2019. It can be adopted early with no restriction. Where early adoption is chosen, entities must disclose this fact. However, for small entities applying Section 1A Small Entities, disclosure is encouraged but not required.

The accounting required for intragroup and other related party loans has been a source of difficulty since FRS 102 was first issued.

Currently, where a loan is made on a non-market basis, it is necessary to identify an equivalent market interest rate and use that to discount the cash flows to present value.  However, the FRC received feedback raising concerns about how practical it is to obtain a market rate, particularly for small entities that would not otherwise be able to access funding. There is also a question as to how relevant the accounting treatment is, especially for owner-managed businesses. 

This amendment is only applicable to small entities (irrespective of whether they are applying Section 1A Small Entities) and proposes that small entities are not required to find a market rate of interest where they have borrowings received from director shareholders or close family of the director shareholders i.e. credit loans. Instead they can just use the transaction price. This exemption only extends to directors who are ‘natural persons’, so loans with corporate directors would not qualify for the exemption.

Any other related party loans – intragroup loans and so on – still need to be accounted for at present value using the market rate. Small entities will still need to disclose these transactions though, as non-market transactions with directors and their family are caught by the related party disclosure requirements in Section 1A. 

If you require any further details on Director's Loans or in relation to our audit and accounting services please contact Alan Smith OSK Audit on 01 439 4200.

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