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FRC comments on issues in relation to the accounting for loans provided to registered providers of social housing

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02 Jun 2016

The Financial Reporting Council (FRC) has today provided comments on an issue that has been brought to its attention regarding the accounting for loans provided to registered providers of social housing and whether such loans should be classified as ‘basic’ or ‘other’ under Financial Reporting Standard (FRS) 102 'The Financial Reporting Standard applicable in the UK and Republic or Ireland'. This classification impacts on whether the loans are measured on a cost or a fair value basis.

FRS 102 explicitly states that where a loan agreement contains a provision requiring the borrower to compensate the lender for early repayment in the event that the current market interest rates are lower than the fixed rate specified in the agreement, this does not stop the loan from being classified as ‘basic’.  As well as including such provisions, in the social housing sector, loan agreements can also include provisions for the lender to pay the borrower should the market interest rate be above the fixed rate in the agreement. 

FRS 102 does not specifically address this latter scenario and there are divergent views on whether such loans can be classified as ‘basic’.  The FRC accepts that “FRS 102 does not explicitly address every transaction, other event or condition that an entity may need to account for, and preparers and auditors will need to apply judgement in the application of FRS 102” and highlights that this might lead to diversity in practice in certain areas.  It concedes that in certain circumstances, different interpretations of the standard might occur and indicates that “the classification of loans with two-way compensation clauses appears to be one such case”. 

Concluding the FRC comments:

In relation to this specific issue, the FRC notes that diversity in practice may arise and reminds preparers that FRS 102 (paragraph 8.6) requires disclosure about judgements that have had a significant effect on the amounts recognised in the financial statements. Looking forward, the FRC is starting work on the triennial review of FRS 102, and expects to reconsider the conditions in paragraph 11.9 as part of that process. As well as considering this compensation clause, this will also include consideration of any other issues raised in relation to the application, in practice, of paragraph 11.9. As a result any amendments will reflect wide experience of applying FRS 102. The FRC expects to consult on any proposed amendments early in 2017, which would be effective from 1 January 2019, although early application may be available.

The press release is available on the FRC website.

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