The Companies Act 2006 changes the requirements for disclosing this potentially sensitive area of the accounts. Many firms have not implemented the new requirements properly.
The disclosure requirements in respect of transactions with directors have changed significantly as a result of the Companies Act 2006 and SIs 2008/409 (Small Companies and Groups) and 2008/410 (Large and Medium Companies and Groups). The most common practical problem is the disclosure of advances to the directors. The disclosures required by companies’ legislation in respect of such transactions are:
In this context an advance could be: an amount explicitly loaned to a director; or an amount that makes the loan account a debtor in the company; or that increases that debtor amount.
Note that the above requirements indicate that each amount should be shown separately regardless of size. However, it is generally accepted that some aggregation of small / similar amounts would be acceptable.
There is no longer a requirement to disclose the maximum overdrawn amount nor is there a requirement to disclose transactions in which a director has a material interest.
Of course, in the full accounts FRS 8 / FRSSE would also require disclosure of any other material transaction with the director. Note that the definition of ‘material’ is not the same in FRS 8 and FRSSE. The FRSSE just looks at materiality in the context of the reporting entity whilst FRS 8 requires materiality to be assessed in terms of the related party also.
Consider the following example:
Mr Smith is the only director and shareholder of a small company with a 31 December 2010 year-end. The opening balance on the loan account is a balance of £1,000in favour of Mr Smith.
At the end of each month his mortgage is paid from the company bank account at £1,000 per month.
On 1 July 2010 he received a dividend of £15,000.
In the full accounts, the Accounting Standard and the Companies Act must be complied with as follows:
The following is a summary of the directors’ transactions with the company during the year.
|Balance due from the company at 1 January 2010||1,000|
|Payments on behalf of director||(12,000)|
|Balance due from the company at 31 December 2011||4,000|
|Advances to director||£|
|Five monthly payments of £1,000 on director's behalf, interest-free and repayable on demand||5,000|
The only transactions that need to be disclosed are for the months when there was a debit balance, i.e. the five months February to June.
In the abbreviated accounts of small companies, only the Companies Act must be complied with and so only the ‘Advances to director’ (in the box above) need to be disclosed.
It is possible to include the related party transaction disclosure regarding the dividend paid to the director within this note.
For further details on Directors’ transactions and disclosures under the Companies Act 2006, call the Advisory Services helpline on 01908 248250 or view the Directors’ transactions and disclosures FAQ.