Common Sense Prevails

Last week, the Financial Reporting Council (FRC) concluded its triennial review of UK GAAP, by publishing amendments to FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. The changes are important. The FRC believe the simplifications will benefit up to four million businesses.

ICAEW has played a major part in the triennial review process, ensuring that the views of our members were represented. Overall we regard the changes as common sense and well-targeted, focusing on cost-effectiveness and the usefulness of the information reported. 

The amendments make five substantive changes. The most welcome of these is likely to be the simplified measurement rules for directors’ loans to small entities. Initially, FRS 102 required many such loans to be measured at present value, using a discount rate equal to a market rate of interest for a similar debt instrument. ICAEW raised the significant concerns of many of our members about the impracticalities of determining an appropriate discount rate. We also questioned the information value of the notional interest charge debited to profit or loss in the context of owner-managed businesses. As a result the FRC issued an optional interim relief in May 2017. This allowed small entities to measure such loans at transaction price, provided the director was a shareholder in the entity. The relief was also available to loans made by close family members of that director.

Last week’s amendments went a step further. The exemption is now available to loans from a director’s group of close family members when that group contains at least one shareholder in the entity. In other words, the director does not need to be a shareholder in order for the exemption to be taken up. We are pleased the FRC have implemented this pragmatic solution. 

Our Financial Reporting Faculty will be producing a variety of resources over the coming weeks and months to assist businesses to make a smooth transition to the revised regime. In particular, a webinar will be held in March that will outline the key changes and provide some practical insights, for example in relation to the options available for early adoption.

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