Our Financial Reporting Expert Group contributed to our response to the FRC's consultation FRED 67 Draft Amendments to FRS 102 – part of its Triennial Review 2017.
Overall, we agreed with the FRC’s approach to make incremental improvements and clarifications to FRS 102, as outlined in FRED 67.
We agreed that the FRC’s proposal to amend the criteria for classifying a financial instrument as ‘basic’ or ‘other’ is a proportionate and practical solution. We noted that a number of preparers have experienced difficulty in determining whether, based on the requirements included in paragraph 11.9, an instrument is classified as ‘basic’ for non-standard arrangements.
With respect to allowing a basic financial liability of a small entity that is a loan from a director who is a natural person and a shareholder in the small entity to be accounted for at transaction price, rather than present value, we encouraged the FRC to expand this practical solution to other types of loans, such as intra-group loans in an owner-managed group. We commented that if a director / shareholder provided a loan to a parent of a small group, which in turn loaned the funds under the same terms to a subsidiary unable to access finance itself, the range of possible interest rates which could apply to the intercompany loan could reduce the relevance and reliability of any financial information that discounting is intended to provide.
We also encouraged the FRC to issue guidance for when a small entity ceases to qualify as a small company – or vice-versa. We commented that this would provide clarity as to whether small entities are expected to revisit initial recognition if they became medium-sized entities at a later date despite the instrument still being outstanding.