FRS102, the biggest change in UK accounts reporting for twenty years, comes into force for medium and large companies for accounting periods commencing on or after 1 January 2015 and a small company version of the new standard will come in 2016.
If your group has intercompany loans there may be significant changes as a consequence of the implementation of FRS102.
If the terms of the loan are that it is repayable on demand then the accounting treatment is unlikely to change from the current UK GAAP treatment. However, intercompany loans often have very informal arrangements where it is often assumed that the loan is repayable on demand. You may wish to formalise these agreements to make the repayment terms clear.
If the intercompany loan is for a fixed term and the interest rate is zero or below market rates then the loan is initially recognised at its present value of future payments discounted at the market rate of interest. For the borrower, the difference between the loan value and the present value is taken to the profit and loss as finance income. In subsequent years there will be an interest charge based on the market rate of interest. For the lender, the difference is shown as a finance charge in the first year with subsequent years showing interest received,
For loans already in place at the ‘transition date’, you need to go back to when the loan was originally made and establish the market rate of interest then. You then need to work through the calculations for each year to establish the carrying value at the transition date.
Dormant companies are exempt from this new accounting treatment.
- Loans that carry no interest or interest below market rates will be recorded at a discounted value lower than under existing UK GAAP. The difference will be recorded as interest income for the borrower when the loan is made. This reflects the company having the benefit of an interest free or lower rate arrangement.
- Market rate of interest will need to be established for these loans.
ABC Limited has received an interest free 5 year loan repayable at the end of term of £1m. The market rate of interest is 5%. The carrying amounts in the balance sheet are shown below. The finance income in the profit and loss in year 1 is £216,474.
|Year||Opening value||Interest charge||Closing value|
|5||952,381||47,619||1,000,000 (before repayment)|