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FRC provides optional interim relief for small entities in relation to accounting for Directors’ loans

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09 May 2017

The Financial Reporting Council (FRC) has amended Financial Reporting Standard (FRS) 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’ to provide interim relief for small entities when accounting for Directors’ loans prior to finalisation of the proposals in Financial Reporting Exposure Draft (FRED) 67 Draft Amendments to FRS 102 - Triennial Review 2017.

Proposals in FRED 67 include an amendment that small entities will no longer need to estimate a market rate of interest when measuring loans from a director who is also a shareholder.  These proposals, which are being consulted on at the moment, are expected to be available for early adoption by small entities but are expected only to be finalised in December 2017. 

As a result, they will not be available for those small entities who are preparing financial statements within the scope of FRS 102 for the first time for accounting periods beginning on or after 1 January 2016 which must be filed at Companies House by 30 September 2017.  In order to avoid such entities applying the requirements of FRS 102 prior to these changes for one year, and hence having to measure such loans at present value using a market rate of interest for a similar debt instrument, the FRC proposes the following optional interim measure: 

1.15A   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(a). 

The amendment, which the FRC indicates has received “strong support” is effective immediately with retrospective application available; it shall not be applied directly, or by analogy, to any other transaction, event or condition. 

As it is an interim measure, this amendment will be deleted as part of the finalisation of FRED 67.  It will then be replaced with permanent requirements based on the proposals in FRED 67 after considering the outcome of the consultation process. 

The press release is available on the FRC website.

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