FRS102 and the impact on directors’ and intercompany loans

FRS102 is the biggest change in Irish financial statements reporting for twenty years. It came into force for medium and large companies for accounting periods commencing on or after 1 January 2015.

One of the significant differences between the old and new regime regards the treatment of directors’ loans and intercompany loans. Often these loans bear a low interest rate or more often no specified interest rate and no set repayment terms. Under previous Irish GAAP most entities held these loans at face value on the balance sheet and left them there until settlement. However, under FRS 102 lending arrangements which are financed at an interest rate that is lower than the market rate or even interest free are considered to be financing transactions, which in essence requires that the loan is measured as if it was a loan with a market rate of interest.

It is quite common for companies, or groups of companies, to manage their finances by entering into a loan agreement with their directors or by setting up loans between parent and subsidiaries, or directly between subsidiaries. These arrangements are mainly for commercial reasons and often allow cash to be used where it is most needed and may well be cheaper than using external finance. However, FRS102 will effectively eliminate any reduced funding cost benefits many of these company and intra-group loans are designed for.

A company must now measure these debt instrument at ‘the present value of the future payments discounted at a market rate of interest for a similar debt instrument’. After initial recognition they are measured at amortised cost using the effective interest method, which means an interest charge is recognised systematically over the life of the loan, giving a constant rate of return.

When a company adopts FRS102 for the first time, it must assess all of its accounting policies and ensure that the assets and liabilities on its transition date balance sheet (i.e. in most cases 1 January 2014) are measured in accordance with the standard (except where there are specific exemptions).

To find out more contact a member of our Audit Team.