It is common for owner managed businesses to receive loans either from the owner/director (Director’s Loan Accounts) or from related companies with common ownership. It is also normal for these loans to be provided “interest-free”.
Although it may sound contradictory, under the new UK accounting standard for small companies, FRS102 (1A), there is a requirement with such “interest-free” loans to account for interest at a market rate. This is done by discounting the loan in the balance sheet and then charging a nominal market rate of interest through the profit and loss account throughout the term of the loan.
In practice it will be understandably difficult to determine not only the appropriate market rate of interest, but also the term of a loan which is unlikely to be formally documented. In the majority of cases any interest may be deemed to be “immaterial” and no adjustment required, but business owners may wish to review any large interest-free loans to confirm that they are documented as “repayable on demand” and so are exempt from this new treatment as a short-term liability.
If you have any queries then please contact your account manager or our Audit Partner, Tor Stringfellow, on 0161 832 4451.