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[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off”][et_pb_row admin_label=”Row”][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”http://www.frs102.com/members/premium-toolkit/” type=”big” color=”red”] Return to Main Index[/button] [/et_pb_text][/et_pb_column][et_pb_column type=”1_2″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”center” text_font_size=”14″ use_border_color=”off” border_color=”#ffffff” border_style=”solid”] [button link=”https://uk.frs102.com/members/premium-toolkit/section-34/” type=”big” color=”red”] Return to Section 34 Home[/button] [/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section][et_pb_section admin_label=”Section” fullwidth=”off” specialty=”off” transparent_background=”off” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” make_equal=”off” use_custom_gutter=”off” gutter_width=”3″][et_pb_row admin_label=”Row”][et_pb_column type=”4_4″][et_pb_text admin_label=”Main Body Text” background_layout=”light” text_orientation=”justified” use_border_color=”off” border_color=”#ffffff” border_style=”solid”]Public Benefit Entity Concessionary Loans
Extract from FRS102: Section PBE 34.87-. PBE 34.97
PBE34.87 Paragraphs PBE34.89 to PBE34.97 address the recognition, measurement and disclosure of public benefit entity concessionary loan arrangements within the financial statements of public benefit entities or entities within a public benefit entity group making or receiving public benefit entity concessionary loans. These paragraphs apply to public benefit entity concessionary loan arrangements only and are not applicable to loans which are at a market rate or to other commercial arrangements.
PBE34.88 Public benefit entity concessionary loans are loans made or received between a public benefit entity or an entity within the public benefit entity group, and another party at below the prevailing market rate of interest that are not repayable on demand and are for the purposes of furthering the objectives of the public benefit entity or public benefit entity parent.
Accounting treatment
PBE34.89 Entities making or receiving public benefit entity concessionary loans shall use either:
(a) the recognition, measurement and disclosure requirements in Section 11 Basic Financial Instruments or Section 12 Other Financial Instruments Issues (for example, Section 11 requires initial measurement at fair value and subsequent measurement at amortised cost using the effective interest method); or
(b) the accounting treatment set out in paragraphs PBE34.90 to PBE34.97 below.
A public benefit entity or an entity within a public benefit entity group shall apply the same accounting policy to concessionary loans both made and received.
Initial measurement
PBE34.90 A public benefit entity or an entity within a public benefit entity group making or receiving concessionary loans shall initially measure these arrangements at the amount received or paid and recognise them in the statement of financial position.
Subsequent measurement
PBE34.91 In subsequent years, the carrying amount of concessionary loans in the financial statements shall be adjusted to reflect any accrued interest payable or receivable.
PBE34.92 To the extent that a loan that has been made is irrecoverable, an impairment loss shall be recognised in income and expenditure.
Presentation and disclosure
PBE34.93 The entity shall present concessionary loans made and concessionary loans received either as a separate line items on the face of the statement of financial position or in the notes to the financial statements.
PBE34.94 Concessionary loans shall be presented separately between amounts repayable or receivable within one year and amounts repayable or receivable after more than one year.
PBE34.95 The entity shall disclose in the summary of significant accounting policies the measurement basis used for concessionary loans and any other accounting policies which are relevant to the understanding of these transactions within the financial statements.
PBE34.96 The entity shall disclose the following:
(a) the terms and conditions of concessionary loan arrangements, for example the interest rate, any security provided and the terms of the repayment; and
(b) the value of concessionary loans which have been committed but not taken up at the year end.
PBE34.97 Concessionary loans made or received shall be disclosed separately. However multiple loans made or received may be disclosed in aggregate, providing that such aggregation does not obscure significant information.
OmniPro comment
A public entity is defined as one ‘whose primary objective is to provide goods or services for the general public, community or social benefit and where any equity is provided with a view to supporting the entity’s primary objectives rather than with a view to providing a financial return to equity providers, shareholders or members’.
The following entities normally fall within this definition:
- Charities
- Registered social landlords
- Further education colleges
- High education institutions
- Clubs, societies, trade unions etc.
The key point in order for it to be classed as a public benefit entity is that the entities primary purpose should not be to provide economic benefits to its investors (i.e. cannot provide returns proportionally to its members in any way). An entity should consider its primary purposes in determining whether it is a PBE.
A public entity group is defined in Appendix I of FRS 102 as ‘a public benefit entity parent and all of its wholly owned subsidiaries. The key thing is that they must wholly owned subsidiaries in order to be classed as a PBE group.’
Where a PBE applies one or more of the PBE elements it must disclose this in the form of an unreserved statement in the financial statements.
The special provisions for SBE’s are:
- Profit held for provision of social benefits is not required to be classified as an investment property and instead remains as property, plant and equipment and accounted for in line with Section 17. Obviously if a PBE specifically holds such an asset for capital appreciation then it must be accounted for in accordance with Section 16.
- Income resources from non-exchange transactions. Examples include cash, property received from donators or received in a will. The accounting for such transactions is:
– If the transaction does not impose performance related conditions on recipient = recognise in income when resources are received or receivable. If the resource cannot be measured reliably then it cannot be recognised until it is sold. It is recognised in line with normal recognition criteria.
– If transaction does impose performance related conditions on recipient= recognise in income when the performance related conditions are met
– Incoming resources are received in advance and before revenue recognition criteria are satisfied = recognise a liability i.e. deferred income.
A performance related condition is defined in Appendix I of FRS 102 as ‘a condition that requires the performance of a particular level of service or units of output to be delivered, with payment of, or entitlement to, the resources conditional on that performance’.
Conditions attached to a donation which are not defined as performance related conditions do not prevent the revenue being recognised e.g. a condition that the money be invested in property but if the property is sold then it is repayable. In this case the revenue can be recognised and a liability only recognised if it is probable the property would be sold.
- Resources received in the form of services. Examples would include;
- Donated facilities e.g. office space
- Services that would have to be purchased had it not been got for free
- Services provided usually as part of a trade or profession but provided free of charge.
In this instance the PBE should recognise revenue for the value of the service etc provided and recognise an expense at the very same time or alternatively if it is work done on a fixed asset/inventory it would be included as an asset within the relevant asset class. Where it cannot be measured, it could be recognised at the cost of the item to the donor or the estimated sales value when sold on.
- Benefit entity combinations – Appendix I of FRS 102 defines a business combination as the ‘bringing together of separate entities or businesses into one reporting entity’. The accounting requirements for a PBE are if the type of business combination:
– Is in substance a gift of a business for nil or nominal consideration= recognise the assets/liabilities at fair value with a corresponding gain/loss shown in the profit and loss (i.e. the PBE must follow section 19 with regard to fair valuing assets and liabilities).
An example of this would be a charity giving a business to another charity.
– Meets the definition and criteria of a merger = merger accounting can be applied. This is discussed further in Section 19 and Section 9 of this manual.
In order to meet the definition of a merger, all of the following criteria must be met:
– no party is portrayed as either the acquiree or acquirer either by its board or any other party;
– there is no significant change in the class of beneficiaries of the combining entities or the purpose of the benefits provided as a result of the combinations
All parties to the combination, as represented by the board, participate in establishing the management structure of the combined entity and in selecting the management personnel, and such decisions are made on the basis of consensus between the parties to the combination rather than purely by exercise of voting rights (Appendix I of FRS 102). Where the PBE rules do not permit merger accounting, acquisition accounting should be used.
Where merger accounting is applied, the fair values of the assets and liabilities are not adjusted and remain at the book values other than changes required for uniform accounting policies. Merger accounting to be applied is discussed further in Section 19 of the manual. The disclosure requirements are dealt with in Section PBE34.86 above.
- Meets the definition of an acquisition = acquisition accounting at fair value. Acquisition accounting applies the rules set out in Section 19 of FRS 102 i.e. measure the fair value of all assets and liabilities received and allocates the consideration between them.
- Public benefit concessionary loans – Appendix I of FRS 102 defines a public benefit entity loan as ‘a loan made or received between a public benefit entity or an entity within a public benefit entity group and another party:
- At below prevailing market rates of interest; and
- That is not repayable on demand; and
- Is for the purposes of furthering the objectives of the public benefit entity parent.
Where the all three of the above requirements are met, the PBE does not have to account for these loans under Section 11 or Section 12 of FRS 102 (i.e. measure these at the present value of the future cash flows using a market interest rate). Instead the entity is provided with an accounting policy choice to apply either:
- The recognition, measurement and disclosure requirements of Section 11 of FRS 102 (i.e. at amortised cost) If this option is chosen they must apply all the disclosure requirements of Section 11 and Section 12; or
- Recognise the loan received or paid at the actual amount received or paid with no discounting required and subsequently adjusted for any interest charged (if any) and repayments made. Section PBE34.97 above details the disclosure requirements in this instance.
The above policy choice should be applied consistently, it must treat loans received or given in the same way.
Transition exemptions
A PBE can elect not to apply the above requirements of FRS 102 for combinations entered into prior to the date of transition. However where an entity does not avail of this exemption they must account for all combination prior to transition as if FRS 102 had always applied.
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