BIM33160 - Stock: valuation: mark to market or marking to market

The stock is valued at its market value, rather than at the lower of cost and net realisable value.

Strictly SSAP9 only allows the use of the lower of cost and net realisable value as a method for valuing stock. Therefore entities which wish to use a mark to market method are using the true and fair view override. That is, they assert that in order to present a true and fair picture of the business a mark to market valuation method must be used, rather than the lower of cost and net realisable value.

This method is only appropriate where there is a liquid market in the stock, so that the value could be realised easily. It is currently used by financial institutions and commodities dealers.

Its use is not currently appropriate for agricultural produce, see BIM31027.

Existing law & practice before 1 August 2001

Many financial concerns used a mark to market (MTM) basis of valuation in their accounts. Under MTM, assets held at the balance sheet date are valued at their market value (also described as the fair value) even if that is higher than their cost.

MTM was not considered to be a valid basis for taxation because it could be said to anticipate profits. Therefore, Inspectors were advised that they should not insist on its adoption for tax purposes, (or, more accurately, that they could permit companies to make computational adjustments that removed unrealised gains and losses in the computation of trading profits - a tax basis known as the realisation basis).

But where a financial concern used MTM in its accounts, and did not wish to prepare tax computations on a different basis, then subject to the facts of the particular case, Inspectors could accept the MTM basis for tax purposes provided:

• it was applied consistently, and
• the approach in Pearce v Woodall-Duckham [1978] 51TC271 is applied to any change to it from some other basis, BIM34070.

HMRC change of view

Following a review of the practice of insurance companies, HMRC came to the view on legal advice that where:

• MTM is used in any company’s accounts,
• The use of it is in accordance with generally accepted accounting practice (including appropriate industry Statements of Recommended Practice),
• The profits and losses thrown up by the comparison of fair values is taken to profit and loss account or its equivalent, and not to reserve,

then there is no rule of law requiring the profits or losses disclosed by the accounts to be adjusted for tax purposes to give effect to the realisation basis.

This is considered to be the case both before and after periods affected by FA98/S42 (profits to be based on a true and fair view).

Implementation of the revised view of the law on MTM

For banks, insurance companies and other financial concerns, see the Banking Manual, the Life Assurance Manual, the General Insurance Manual or the Lloyd’s Manual, as appropriate.

Where other concerns use MTM in their accounts in respect of those assets where any profit on sale would be brought into account as a trading receipt, and this is in accordance with UK GAAP and have followed that basis for tax, no action is required.

Where other concerns have been using MTM in their accounts and bring any profits and losses into their profit and loss account, and this is in accordance with UK GAAP but have made computational adjustments to exclude those profits and gains for tax purposes, HMRC now consider that they must now follow MTM for tax purposes. This change of view should be clearly indicated to the relevant concerns by the officer dealing with the case. MTM should apply for the next accounts to be filed following the approach - accounts already filed with tax adjustments to exclude those profits and gains for tax purposes may be accepted as being in accordance with HMRC practice. Guidance on change of basis is at BIM34000 onwards.