FRC updates guidance on UK Financial Reporting Standards

By Amy Hutchinson, Assistant Director – Technical Policy

6 November 2015

The FRC has updated the Staff Education Notes it produces for users of FRS 102.

The Financial Reporting Council has made the following changes to the Staff Education Notes that it produces for the convenience of users of FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland:

  • New Staff Education Note (SEN) 16 Financing transactions has been issued. SEN 16 gives guidance on accounting for transactions referred to in FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland as financing transactions.
  • SEN 2 Amortised cost has been reissued to reflect consequential amendments resulting from the issue of SEN 16.
  • SEN 13 Transition to this FRS has been updated to reflect changes made to Section 35 Transition to this FRS of FRS 102 in July 2015.
  • The FRC website has also been updated to provide information on how the SENs may be useful for entities that apply Section 1A Small Entities of FRS 102 or FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime.

The new SEN 16 will be of interest to many preparing accounts under FRS 102, as it addresses the common area of accounting for loans between related parties with no interest or a below market rate of interest. FRS 102 in essence requires such a loan to be measured as if it were a loan with a market rate of interest. This means that a loan (with a fixed term) would be measured at a market rate of interest of a similar financial asset or liability Therefore a difference arises between the amount of cash received/advanced and the present value.

The SEN notes that ‘where a loan is made at a non-market rate of interest and the lender and the borrower are related parties because one owns the other or the lender and borrower are owned by the same entity or person, the difference arising on initial recognition of the loan would generally be accounted for as a distribution or capital contribution.’ Entities subject to company law will need to consider whether such distributions recorded in the financial statements for reporting purposes are also distributions as a matter of the law.

The SEN also notes that the present value of a financial asset or financial liability that is repayable on demand is equal to the undiscounted cash amount payable reflecting the lender’s right to demand immediate repayment.

Staff Education Notes aim to illustrate certain requirements of FRS 102, but should not be relied upon as a definitive statement on the application of the standard.

The SENs are available to download.

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