Directors’ advances under FRS 105
Micro-entities preparing financial statements under FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime are still required to comply with the disclosure requirements in respect of directors’ advances, credit and guarantees. This is often an area which poses a lot of questions and the law governing this area is to be found in section 413 of Companies Act 2006.
The directors’ advances, credit and guarantees disclosure in UK GAAP derives from the requirements of company law. The requirements themselves are reflected in FRS 105, paras 6A.3 and 6A.4 (for UK micro-entities choosing to apply FRS 105) and paras 6B.19 to 6B.21 for Irish micro-entities.
Directors’ advances
An advance is effectively a payment to a director that creates, or increases, a debit balance on their current account (sometimes referred to as a ‘director’s loan account’). An advance arises when the director becomes indebted to the company as can be seen in the following example.
Example
Lisa is a director of King Ltd. Details of her loan account for the year ended 31 March 2020 are as follows:
| Opening balance at start of year |
(£10,000) |
| Withdrawal 1 |
£6,000 |
| Withdrawal 2 |
£3,000 |
| Withdrawal 3 |
£2,000 |
| Withdrawal 4 |
£5,000 |
| Dividend |
(£10,000) |
| Closing balance at end of year |
(£4,000) |
Up to withdrawal 2, the director is merely withdrawing from her credit balance, so these withdrawals do not constitute an advance because her current account remains in credit. At withdrawal 3 the current account becomes £1,000 overdrawn (which is an advance) and at withdrawal 4 her current account is £6,000 overdrawn. The overdrawn balance is repaid following payment of the dividend of £10,000 returning her current account to £4,000 in hand.
All advances are interest-free and are repayable on demand.
Section 413 of Companies Act 2006 would require disclosure as follows:
| Director’s advances, credit and guarantees
During the year, the company made interest-free advances to a director amounting to £6,000 (2019: £X). These were repayable on demand. The company received repayments of £6,000 (2019: £X). |
You will note that s413 does not require the director’s name to be disclosed; nor is any disclosure of the director’s name required under FRS 105. The same also applies under FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, including small entities choosing to apply the presentation and disclosure requirements of Section 1A Small Entities.
In the example above, if the opening balance on the director’s current account was £nil, then the advances would total £16,000 and the credit would be £10,000. As noted above, any withdrawals from a pre-existing credit balance are not advances.
Disclosure requirements
Section 413 of Companies Act 2006 requires the following to be disclosed in respect of an advance or credit:
| (a) The amount
(b) Indication of the interest rate (c) Main conditions (d) Amounts repaid (e) Amounts written off (f) Amounts waived Monetary amounts are required to be disclosed in respect of (a), (d) (e) and (f) above. |
It should be noted that it does not matter if the opening and closing balances of the director’s current account were either £nil or in credit at the start and end of the year. If the current account becomes overdrawn at any point during the year (hence giving rise to an advance) the s413 disclosures are triggered.
These requirements apply to anyone that was a director during the year. Therefore, even if a director resigned part-way through the year, advances and credits in their current account would still need to be disclosed.
Maximum amounts outstanding
There is no longer a requirement in company law to disclose the maximum amounts outstanding during the year. Some entities have chosen to do so and this would be permissible if the directors consider that making such disclosure results in a true and fair view being given. However, the vast majority of companies (particularly small companies) choose not to make this disclosure.
Category: Accounting and standards
