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Section 11 FRS 102 – What to watch out for where the on demand get is used.

Welcome to Query Of The Week

Welcome to this week’s Query Of The Week. Each week our technical team respond to a huge number of client queries and in this segment, we share with you the most common questions that keep coming up time and time again.

In this week’s Query Of The Week, John Murphy discusses Section 11 FRS 102 – What to watch out for where the on demand get is used.

Financial Instruments Under S.11 FRS 102 (FRS 102 Bootcamp 5)

If this Query Of The Week was of interest to you, you will also be interested in our Financial Instruments Under S.11 FRS 102 (FRS 102 Bootcamp 5) online CPD Course.

Full details for this online CPD course can be found below:

Webinar Duration 1 Hour
Fee €25
Presenter John Murphy – OmniPro
Category Financial Reporting

Query Of The Week – Video Transcript

(Please note that this is a direct unedited transcript of the spoken word as recorded on the video) 

So, this week we received a query that is popping up on a regular basis over on the KnowledgeHUB technical helpdesk.

When looking at a file or reviewing financial statements, it is easy to see there’s an issue relating to Financial Instruments (Section 11 FRS 102).

They are looking through the financial statements and they see something like an intercompany loan.

In this instance there was a directors or intercompany loan in a medium / large company, and it was classified as a creditor within one year and disclosed as being on demand but when you look at the terms of the bank loan agreement or the disclosures in the accounts in relation to bank loan agreements it specifically states that the other loans (i.e. the intercompany/directors loan is subordinated)

So that creates an issue from a Section 11 point of view because really once, although there might be an agreement in relation to intercompany loan let’s say, that’s its repayable on demand, the fact of the matter is since that loan was given the other party has entered into an agreement with the bank whereby they have said that they have subordinated the loans in that particular case.

So how can these loans be treated as on demand? They are actually contradicting the “on demand” concept which creates an issue because if your saying now “The loan is not on demand “because they’ve changed the terms”, effectively what we’re saying is that it’s a financing transaction.

This assumes that it’s not at market rates, well then you are into the issue of now technically that loan should be accounted for as a financing transaction under the rules of section 11.13. It needs to be present valued at a market rate of interest based on the future cashflows.

So, you have to determine when will it be paid and present value at the market rate of interest and do the accounting under section 11.13 as a result.

So, it can have a huge impact on the way that financial statements look because your liability will decrease and potentially the credit will go to equity and you’ll have an unwinding of the interest into the P&L over the life of the period that it’s going to be paid.

So, these are just some of the issues that Section 11 continues to highlight.

If you are interested in Section 11 which I’m sure a lot of you are as it is an issue in nearly every set of accounts you produce, we have a webinar on the 21st of August that deals exclusively with Section 11 Financial Instruments.