Comments and push-back from accountants led to the change in FRS102 which gives an exemption on director’s loans, according to Steve Collings who was speaking last Friday at AAT’s annual conference.
Collings told the conference that when FRED 67 was issued by the FRC, revealing the changes planned for FRS102, several responses were received which referred to the accounting treatment for directors’ loans.
“Virtually all of the responses referred in some way or another to director’s loans and financial instruments. The problem was that practitioners hate the fact that you may have to discount things under FRS102,” Collings said.
“They’ve introduced this exemption from discounting loans to a small business, or a small LLP, from a director who is also a shareholder. When FRED 67 was finalized, the FRC slightly extended the exemption so that it can also be applied to loans from the close family members of the director, where that group contains at least one shareholder in the group.”
The exemption from discounting director’s loans allows for family members who are shareholders to provide a loan to the small company/LLP without having to impute a market rate of interest. Collings believes this is the FRC recognising the frequent reality of setting up a small business and the new business receiving funding from shareholders who may also be close family members of the directors.
“What I think the standard setters recognise is that if you, for example say: ‘I’m going to set up a coffee shop’. So, you set up a coffee shop, you go to the bank, the bank said: ‘forget it, we’re not going to give you a loan, because you’re too a high risk as you have no credit history’,” said Collings.
“So, your parents, your grandparents, your aunty Barbara, come in and they pump money in. The standard setters appear to recognise that in these small company setups, it’s often close family members that put money in as well to help the business get off the ground. And therefore, if one of the close family members is a shareholder as well, the loan doesn’t need to be discounted either.”
However, accountants wanted the exemption to go further to help small businesses, but the FRC refused to back down as it would defeat the entire point of FRS reforms.
“The problem is, [the FRC] got their hands tied, because they don’t want to create a separate recognition and measurement standard for small companies,” he said.
“People wanted them to do things like provide an exemption from discounting intra-group loans and loans the other way, i.e. when the company lends money to the director. It’s likely the FRC hasn’t gone that far because then they would be creating a different set of recognition and measurement rules for small companies and groups. The whole point of FRS 102 is that all companies reporting under the standard have consistent recognition and measurement principles. The exemption from discounting loans to a small business from a director-shareholder is welcomed but is as far as the FRC are likely to go,” Collings said.
“The whole point of new UK GAAP was to reduce the financial reporting tiers. We now have small companies that are on the same recognition and measurement principles that a large company is. It’s only the presentation disclosure requirements that are different where the small entity applies Section 1A. So, to start creating a separate standard for small entities would then end up diverting away from what the standard actually requires,” he added.