FRS 102 Directors’ loans and gift aid

Posted by

The Financial Reporting Council (FRC) completed the first triennial review of UK GAAP in December 2017.  The majority of the amendments to FRS 102 are effective for accounting periods starting on or after 1 January 2019 with early adoption permissible.  With the exception of directors’ loans to a small company and the gift aid payment, if a company early adopts any other amendment, it must adopt the whole amendments.  Only the directors’ loan relief and gift aid amendment can be early adopted separately without having to early adopt the remainder of the amendments to FRS 102.

This article addresses a point concerning the directors’ loan relief (i.e. which type of loans qualify for the relief as there is some confusion) and examines the gift aid clarification.

Directors’ loans

The accounting requirements of FRS 102 have been a challenge for some, because prior to the amendments, FRS 102 required all financing transactions to be measured at the present value of future payments discounted at a market rate of interest for a similar instrument.  A financing transaction arises when payment is deferred beyond normal credit terms, or is financed at a rate of interest which is below market rate or at zero rates of interest.

Feedback received by the FRC suggested there were concerns about these accounting treatments for companies at the smaller end of the scale.  Small companies may receive financing from the director-shareholders, or family members of the director-shareholders, because commercial funding may be unavailable, or the rates of interest charged by the bank may be too high to justify taking out bank finance.

In May 2017, the FRC announced that a relief would be made immediately available for small companies that receive a loan from a director who is also a shareholder, or from a close family member of that director-shareholder.  The relief was made immediately available so that small companies with a 31 December 2016 year-end could take advantage of the relief.   For many small entities, the first financial statements prepared under FRS 102 were for 31 December 2016.

The effect of this relief means that when a small company receives a loan from a director-shareholder or close family member, which is below market rate or at zero rates of interest, that loan need not be discounted using a market rate of interest for a similar debt instrument.  In other words, the loan can be recognised in the accounting records at cost (transaction price).

The finalisation of the triennial review saw the scope of this relief extended slightly to include loans to small entities from a directors’ group of close family members (which includes the director) when that group also includes a shareholder in the entity.  Hence, if the loan is from a director who is not a shareholder in the small entity, and has no close family members who are shareholders, the loan will not qualify for the relief.

The relief is available only to small companies (as defined in the Companies Act 2006) and small LLPs.  It is not available for loans to a director from the small company, nor is it available for intra-group loans.  Some practitioners are under the impression that the relief is available for all directors’ loans to or from a small company.

The term ‘close members of the family of a person’ is defined in the Glossary to FRS 102 as:

‘Those family members who may be expected to influence, or be influenced by, that person in their dealings with the entity including:

  1. a) that person’s children and spouse or domestic partner;
  2. b) children of that person’s spouse or domestic partner; and
  3. c) dependants of that person or that person’s spouse or domestic partner.’

Related party point

It should be noted that when a director-shareholder, or close family member of that director-shareholder, provides a loan to the small entity at below market rates of interest (or at zero rates of interest), the loan is caught by the related party disclosure provisions in paragraph 1AC.35 of Section 1A Small Entities.  Hence the loan must be disclosed as a related party transactions on the grounds that it has not been concluded under normal market conditions.

Gift aid

Divergent practices were emerging where gift aid payments were concerned.  The issue primarily related to situations where a trading subsidiary made gift aid payments to a charitable parent but no Deed of Covenant was in place.  Where a Deed of Covenant is in place, the issue is less complex because the Deed of Covenant satisfies the recognition of a gift aid payment as a liability where payment is made by the subsidiary to its charitable parent after the year-end.

The FRC received many responses to FRED 68 stating that, in their opinion, a liability should be recognised for an expected gift aid payment if, for example, there is a past history of making such payments (in other words a ‘constructive’ obligation).  The FRC concluded that this is inconsistent with the requirements of FRS 102 as paragraph 32.8, which deals specifically with dividends, states that where an entity declares a dividend after the balance sheet date, that dividend is not recognised as a liability because there is no obligation on the part of the entity at the reporting date.

Similar principles to the treatment of dividends arise with gift aid payments.  A legal opinion obtained by the ICAEW confirms that gift aid payments are a distribution and hence should be treated in much the same way as a dividend.  For tax purposes, a gift aid payment is a donation.

When a subsidiary does not have a legal obligation to make a distribution to the shareholders at the balance sheet date, it essentially has taxable profits and will need to recognise an associated tax expense.  This principle is consistent with paragraph 29.14 of FRS 102 which does not allow the tax effects of dividends to be recognised before the dividend itself.

FRS 102 has been amended to state that when it is probable (ie more likely than not) that a gift aid payment will be made within nine months of the reporting date to the same charitable group, or charitable venturer, and the payment will qualify to be set against profits for corporation tax purposes, the tax effects of the gift aid payment can be accrued.

The gift aid payment is recognised as a distribution to owners (ie in equity) and the tax effects of recognised in profit and loss.


This article has been published to address some important points concerning which types of loans are eligible for the directors’ loan relief (it is only loans TO the company, not loans FROM the company which will qualify for the relief.  In addition, the gift aid amendment will result in less divergent practices emerging in this area.

Category: Accounting and standards, Audit

About the Author ()

Steve Collings is the audit and technical director at Leavitt Walmsley Associates Ltd and the author of 'Interpretation and Application of International Standards on Auditing'. He is also the author of 'IFRS For Dummies' and 'The AccountingWEB Guide to IFRS'. More about Steve's publications can be found by clicking on the 'Published Work' tab on the homepage. Steve is also a regular contributor of articles to www.accountingweb.co.uk, the UK's largest resource for professional accountants on a free subscription basis and is a member of the Society of Authors. Steve is an Editorial Board member for Wiley Insight IFRS and sits on the AAT's Financial Reporting Technical Panel. In 2011 Steve was named 'Accounting Technician of the Year' at the British Accountancy Awards and won 'Outstanding Contribution to the Accountancy Profession' by the Association of International Accountants in 2013. Follow Steve on Twitter - @stecollings

Comments are closed.