This follows the publication of a raft of amendments to FRS 102 released in March as part of a triennial review. 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.

The FRC has passed one of these changes, without consultation, creating 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.

FRS 102 is being amended, with the following being inserted: ‘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.’

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

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.’

Dr Nigel Sleigh-Johnson, Head of ICAEW’s Financial Reporting Faculty, said: ‘Our response to the FRC’s call for feedback highlighted that many of our members had major concerns about a number of FRS 102 requirements. It is good to see that the FRC has taken these concerns seriously. The changes proposed as a result of our suggestions will be seen as a very positive step by members.

‘ICAEW has highlighted to the FRC on a number of occasions significant concerns about the requirement in FRS 102 for all reporting entities, including small entities, to determine and apply a discount rate for loans from directors by reference to the market rate for a similar debt instrument with an unrelated party.

‘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.’

The FRC, in FRED 67, is also considering changes to other aspects of the reporting of director’s loans, investment property and the definition of financial instruments.

The exposure draft proposes that small entities are not required to find a market rate of interest where they have borrowings with director shareholders or close family of the director shareholders. 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.

Likewise 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 off-market transactions with directors and their family are caught by the related party disclosure requirements in Section 1A.

The 142-page exposure draft FRED 67, Draft amendments to FRS 102 Financial Reporting Standard applicable in the UK and Republic of Ireland, Triennial review 2017, Incremental improvements and clarifications is available here.