CFM17528d - Repos: FA 2007 rules for companies: debtor quasi-repo examples

Example: Debtor quasi-repos

( CFM17512a explains why both A and B have a debtor quasi-repo in this case.)

Transaction

As in CFM17512a:


  • 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. This represents the advance of 100 from C, plus a finance charge of 2 (4 months at 6% per annum). (The transaction will separately reflect the market value of the securities being transferred to B.)
  • 30/6/09: B purchases the same or similar securities from C for 103. This includes a further finance charge of 1 (2 months at 6% per annum).

Treatment of A

Accounting entries, in accordance with GAAP (excluding profit/loss on disposal to B)

In addition to the entries at CFM17512a:
1/1/09-30/4/09 (repo “interest” accrual):



Dr P&L 2; Cr Financial Liability 2 (the financial liability which has increased to 102 is reduced to nil by the novation payment made on 30/4/09)
Net Profit and Loss result:Debit 2: “interest”


Tax Treatment

A’s finance charge of 2 is treated as interest for loan relationships purposes ( CFM17524).

Treatment of B


Accounting entries, in accordance with GAAP (excluding acquisition cost of securities)

In addition to the entries at CFM17512a:
30/4-30/6/09 (repo “interest” accrual):



Dr P&L 1; Cr Financial Liability 1 (the financial liability which has increased to 103 is reduced to nil by the payment of the purchase price on 30/6/09)
Net Profit and Loss result:Debit 1: “interest”


Tax Treatment

B’s finance charge of 1 is treated as interest for loan relationships purposes ( CFM17524).

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).

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