CFM17512a - Repos: FA 2007 rules for companies:
debtor quasi-repo examples
This guidance describes the corporation tax treatment of sale
and repurchase arrangements (“repos”) where the initial
sale of securities takes place on or after 1 October 2007
Debtor quasi-repos: examples
Transaction
Treatment of A
Treatment of B
- 1/1/09: A sells securities to C for
100.
- 30/4/09: A novates its rights and
obligations under the repo to B (also a borrower), for which it
pays 102 to B, agreed at the outset (this includes a finance charge
of 2; see
CFM17528d). (The transaction will
separately reflect the market value of the securities transferred
to B.)
- 30/6/09: B purchases the same or similar
securities from C for 103, agreed at the outset (this includes a
finance charge of 1; see
CFM17528d).
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| Accounting entries, in accordance with GAAP |
| 1/1/09 (receipt of advance): | Dr Cash 100; Cr Financial Liability 100 |
| 30/4/09 (novation payment to B): | Dr Financial Liability 102; Cr Cash 102 |
A does
not have a debtor repo because it does not meet
Conditions D and E of the debtor repo conditions (
CFM17508): it is not entitled or obliged
to buy the securities, and its financial liability is extinguished
otherwise than by a purchase of the securities.
A has a
debtor quasi-repo because all of the conditions in
CFM17512 are met:
- Condition A: A receives an advance of
money from another person (C).
- Condition B: in accordance with GAAP, A
records a financial liability in respect of that advance.
- Condition C: a person (A) sells
securities.
- Condition D: the arrangement entitles or
obliges B (a person other than the borrower) to buy those or any
other securities, and provides for B to receive money from A to
enable B to make that purchase (an “other relevant
provision”).
- Condition E: in accordance with GAAP,
B’s receipt of the money from A extinguishes A’s
financial liability in respect of the advance.
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| Accounting entries, in accordance with GAAP |
| 30/4/09 (receipt of advance): | Dr Cash 102; Cr Financial Liability 102 |
| 30/4/09 (purchase of securities): | Dr Financial Liability 103; Cr Cash 103 |
B does
not have a
debtor repo because it does not meet Condition C
of the debtor repo conditions (
CFM17508): it does not sell any
securities to the lender.
B has a
debtor quasi-repo because all of the conditions in
CFM17512 are met:
- Condition A: B receives an advance from
another person (A).
- Condition B: in accordance with GAAP, B
records a financial liability in respect of that advance.
- Condition C: a person (A) sells
securities.
- Condition D: the arrangement entitles or
obliges B subsequently to buy those or any other securities. (Note:
B would still have a debtor quasi-repo and its tax treatment would
be the same if, under the arrangement, B had been entitled or
obliged to buy the securities from a person other than C. This is
because Condition D does not specify the person from whom the
securities are to be bought.)
- Condition E: in accordance with GAAP,
B’s subsequent buying of the securities extinguishes its
financial liability in respect of the advance.
Further point to note
This transaction corresponds to the creditor
repo referred to in the footnote to the example at
CFM17550a (where C is a company).
