CFM16520 - Transition to IAS: cases where there is no prior period adjustment: meaning of ‘carrying value’

FA96/SCH9 paragraph 19A and FA02/SCH26 paragraph 50A: carrying value

This guidance describes the treatment of loan relationships and derivative contracts in accounting periods beginning on or after 1 January 2005.

Paragraph 19A(4A)/Paragraph 50A(3A) includes in the carrying value amounts that might be shown separately in the accounts, such as accrued interest and provisions for impairment losses.

Paragraph 19A(4B)/Paragraph 50A(3B) ensure that any adjustments made under a number of specific provisions in the loan relationships and derivative contracts rules are taken into account in arriving at the carrying value for tax purposes. These tax adjustment provisions for loan relationships are:

• FA96/S87 (2) – connected parties ( CFM5400+)
• FA96/S88A (4) – reset interest ( CFM6250+)
• FA96/S94 – indexed gilts ( CFM5940+)
• FA96/S94A (2) – embedded derivatives ( CFM13072+)
• FA96/S96 (2) – specific gilts not held as the integral part of a trade( CFM5955+)
• FA96/S154 (6) – FOTRA securities ( INTM36800+)
• FA96/SCH9 paragraphs 1A, 2, 6, and 18 – special computational rules.

For derivative contracts the tax adjustment provisions are:

• FA96/S94A (2) – embedded derivatives in loan relationships
• FA02/SCH26 paragraphs 21 and 28 – special computational rules.
• Regulations 7, 8 and 9 of the Disregard Regulations in cases where an election under Regulation 6 of those regulations is made (Regulation 6(12A)(b). See CFM13270 for more on the Disregard Regulations.

Example of adjustment to carrying value

CFM5421c gives the example of a bank that issues bonds to a subsidiary, a connected party. Under FA96/S87, the bank must use the authorised accruals basis for tax purposes in accounting for the bond in accounting periods ending before the transition to IAS, and the amortised cost basis in periods after the transition. The ‘carrying value’ under FA96/SCH9/PARA19A is the authorised accruals/amortised cost basis, not the mark to market/fair value basis used in the accounts.

Carrying value and bad debts disallowed

For loan relationships purposes only, FA96/SCH9 paragraph 19A(4BA) provides that in determining the carrying value, no account is taken of bad debts previously disallowed under FA96/SCH9 paragraph 5(1) for a loan relationship or ICTA88/S74 (1)(j) (for a trade debt). The effect is to allow as a transitional debit the amount previously disallowed.