Impact of FRS 102 Part 6: Points to Watch

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In the last of our series on FRS 102 we look at two of the issues arising when going through the conversion process.

Impairment of Loans

As described in Part 3 of this series, if interest is stopped on a loan it will lead to impairment ( or added provision). This is due to the standard requiring you to continue to calculate interest for accounts purposes.  One further complication will be if the loan term is rescheduled at the same time.

It is important to remember that it is the lost interest on the revised term and not the original term that will be important for the calculation of impairment. As you are calculating interest over a longer period of time then the level of impairment on this loan would be greatly increased. In some cases this can lead to the majority of the loan being impaired.

To show the impact of this if we took the situation of a loan with a remaining balance of £1,200 and an original interest rate of 1% which was being repaid at £207.06 per month over a 6 month period. If the loan balance is rescheduled over 10 years and interest is stopped then they will repay £10 per month. The level of impairment increases to over £500 in this example. If the term had not been increased the level of impairment would have been less than a tenth of this level of impairment.

Write off of Loans

The new standard has different rules covering when loans are written off (derecognised) for accounts purposes (see Part 4 for more details). An added complication is that whether a loan is written off or provided for has an impact on how you treat any “bad debts recovered”. If the loan is only provided for then you would show the recovery as loan repayment and reduce the provision accordingly. It does mean that the rules for derecognition of loans are going to make accounting records even more “messy” for something that will have no net effect on your surplus or net assets.