Common sense - relatively speaking

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As a director or shareholder – do you want details of your transactions with your company to be in the public domain?

If you have a December year end, your auditor may well have raised their concerns over the impact of Companies Act 2006 on accounting disclosures relating to Directors’ transactions.

The latest Companies Act is worded in such a way as to require separate disclosure of each individual advance made to a director. For small owner-managed businesses this could lead to extensive notes full of minor transactions that are largely pointless, but tell a story to those who may take an interest in such information.

With the responsibility for this disclosure in the hands of company directors, how are the auditors going to extract such detailed information, for some directors, sensitive and possibly detrimental information that could affect their reputation?

This has created debate as to what the accounts should show and a widespread feeling across business and the accountancy profession that some common-sense will have to be applied. The Department for Business, Innovation & Skills “BIS” has already consulted on amendments the Companies Act to allow banks to aggregate disclosures on advances to directors and this was allowed by the government.

Statutory disclosure relates to advances granted to directors and so where a director’s current account is in credit and stays that way, it is likely that the director is not receiving advances. However an overdrawn position effectively means that the company director has taken money that is not their own and is the property of the company.

Auditors and accountants have continued to use summaries of transactions with opening and closing balances and maximum balances disclosed under the previous 2005 Companies Act. The extreme example would show details of every single advance or credit and every repayment set against them in addition to interest rates and terms associated with these transactions. As there is no materiality associated with this disclosure then this could be considered ridiculous.

A “Big 4” audit firm published an analysis of this problem that suggested that summarised details of advances and repayments together with the maximum amount outstanding in the period and year end balance should be sufficient. This comment was based on the fact that the EU Directive from which this disclosure requirement is derived does not require every individual movement on a loan account to be disclosed.

This approach however is not completely consistent with the law. If aggregate amounts are used then it may not be obvious that at some point a directors’ loan balance did become overdrawn and should have had shareholder approval. This approach may also conceal the fact that dividends were approved when there were insufficient realised profits. In many cases this may not matter until a company gets into financial difficulty and more in depth questions are asked.

So what is the position to those granted with common sense? Well we suggest the following:

• Up to now we have been analysing Directors loan accounts for tax purposes and this analysis is useful to establish whether there have been any overdrawn positions during the period;

• Identify large transactions that are individually material - £10,000 is a good starting point as it is the amount that requires prior approval of shareholders;

• Identify amounts advanced to directors for personal use and consider whether these need separate identification;

• Separately identify material repayments and then aggregate the remaining repayments;

• Consider any interest rates, security and terms of any loans for disclosure.

The big question we keep getting asked is what is the difference between disclosure in full accounts and abbreviated versions, if the company is entitled to file abbreviated accounts?

We believe that if a director’s balance is not overdrawn then it is unlikely that a disclosure will be required in the abbreviated accounts because the director has not taken unapproved amounts from the company. It will of course be up to different advisers to decide how they wish to interpret the law, but hopefully common sense will prevail and we won’t be disclosing the cost of a coffee or an I-tune download purchased on a company credit card.

To find out more about any of these stories or Ward Goodman please contact 01202 875900