🔹 Introduction

In the UAE, many family-owned and closely-held companies maintain Shareholders’ Current Accounts (SCA) to record funds introduced or withdrawn by shareholders. However, the accounting treatment of these balances is often misunderstood.

Some auditors reclassify SCA balances as Due from Related Parties / Due to Related Parties under liabilities, while others adjust retained earnings directly into SCAs. Both treatments can materially affect the net worth, bank facilities, and valuation of the company — particularly when using the book value method for partner buyouts.

So, what does IFRS say? And what is the right, practical treatment?

🔹 Understanding the Nature of Shareholders’ Current Accounts

1. If Shareholder Injects Money
   • Normally recorded as liability (Due to Shareholder).
   • Example: Shareholder brings AED 1m → shows under liabilities until formally converted into equity or repaid.
2. If Shareholder Withdraws More than Profits Declared
   • Recorded as receivable (Due from Shareholder).
   • Example: Company pays shareholder AED 500k without declared dividend → treated as receivable (asset).
3. If Profits are Earned
   • Profits stay in Retained Earnings until formally declared as dividend or capitalized.
   • Simply moving retained earnings to SCA without declaration = not correct under IFRS.

🔹 Can Shareholder Balances Be Treated as Loans?

Yes — shareholder current account balances can be treated as loans if the arrangement indicates repayment terms or interest:

• Due to Shareholders (Loan from Shareholder to Company)
  • Falls under financial liabilities (IFRS 9).
  • If interest-bearing, interest expense must be recognized.
  • If interest-free but long-term, may require discounting to present value using a market rate, with the difference treated as equity contribution.
• Due from Shareholders (Loan from Company to Shareholder)
  • Falls under financial assets (IFRS 9).
  • Must assess recoverability and possible impairment (ECL model).
  • If interest-free, may require fair valuation, with the difference treated as a deemed distribution.

👉 Implication:

• If shareholder balances are treated as loans, they no longer sit in equity — they impact gearing ratios, net worth, and valuation.
• Banks may view large shareholder loans as weak capital structure, potentially restricting facilities.

🔹 Alternative IFRS Presentation (On-Demand or Related Party Balances)

In practice, shareholder balances do not always need complex discounting or interest adjustments:

1. As Loan on Demand
   • If balances are repayable immediately on demand, IFRS 9 allows them to be carried at face value.
   • Since repayment can be demanded anytime, no discounting or interest is required.
   • They are classified as current liabilities (if payable) or current assets (if receivable).
2. As Due from / Due to Related Parties
   • If no formal loan agreement exists, balances can be shown as related party receivables/payables.
   • This requires disclosure under IAS 24 Related Party Disclosures, including terms and conditions.
   • This treatment is widely used in practice and avoids unnecessary debate on fair valuation.

🔹 IFRS Guidance

• IAS 1 Presentation of Financial Statements
  • Equity comprises Share Capital, Reserves (Retained Earnings, Other Reserves).
  • Related party balances that are repayable = liabilities.
• IAS 32 Financial Instruments: Presentation
  • Any obligation to deliver cash to shareholders = liability.
  • Only declared dividends reduce retained earnings.
• IFRS 9 Financial Instruments
  • Related party loans must be measured at amortized cost or fair value.
  • Interest (even if not contractually charged) may need to be imputed — unless balances are on demand.
• IAS 24 Related Party Disclosures
  • All shareholder balances must be disclosed with relationship, terms, and policies.

🔹 Practical Examples

• • Example 1: Proper Treatment of Profits
    • Company earns AED 2m profit in 2024.
    • No dividend declared → Retained Earnings increase by AED 2m.
    • If shareholder withdraws AED 500k:
    • Dr. Shareholders Current Account (Receivable) 500k
    • Cr. Bank 500k
    • Balance Sheet → Assets show receivable; Retained Earnings remain intact.
  • Example 2: Improper Reclassification
    • Auditor directly moves AED 2m profit to SCAs without declaration.
    • Retained Earnings lower, SCAs higher → not IFRS compliant.
  • Example 3: Loan Treatment
    Shareholder lends AED 5m, no interest, repayable in 5 years.
    Under IFRS 9, must be discounted at market rate (say 7%).
    Difference between discounted liability and cash received = equity contribution.
  • Example 4: On-Demand Balance
    • Shareholder current account payable is repayable anytime on request.
    • Classified as current liability at face value, with no discounting or interest implications.

  🔹 Impact on Valuation

  • If balances are kept in equity (retained earnings) → net worth higher.
  • If reclassified as shareholder loans (liabilities) → equity lower.
  • Outgoing partners may push for loan classification to reduce book value; incoming investors/banks prefer equity classification for stronger net worth.

🔹 Auditor’s Practical View

• Banks: Prefer retained earnings under equity; loan classification reduces net worth.
• Shareholder Disputes: Reclassification can be used to manipulate valuations.
• IFRS Position: Clear — profits cannot move to SCAs without proper declaration. If balances are loans, they must follow IFRS 9, but on-demand or RP disclosure gives a practical alternative.

🔹 Best Practices (Recommended Approach)

1. Keep retained earnings in reserves until dividends are declared.
2. Pass board/shareholder resolutions before moving profits.
3. Disclose loans to/from shareholders separately, with terms and interest policy.
4. If balances are on demand, carry them at face value — no interest or discounting required.
5. If no loan terms exist, present as Due from/Due to Related Parties under IAS 24.
6. Communicate clearly with banks/partners on classification impacts.

🔹 Consultant’s Note

At Spectrum, we often see shareholder balances being misclassified — sometimes to reduce taxes, sometimes to reduce partner payout. But the risk is high: non-compliance with IFRS, weaker net worth, and disputes with bankers or partners.

The golden rule:

Retained earnings are company reserves until lawfully distributed. Shareholders’ Current Accounts are transactions between the company and its owners. If structured as loans, IFRS 9 must be applied — unless they are on demand or disclosed as Due from/Due to Related Parties, which provide simpler, compliant alternatives.

🔹 Conclusion

• • Retained earnings cannot be transferred to SCAs without declaration.
  • Shareholder balances can be loans, but on-demand balances can be carried at face value without discounting.
  • Alternatively, balances can be shown as Due from/Due to Related Parties under IAS 24.
  • The choice between equity and liability classification has serious implications for net worth, valuation, and banking facilities.