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).
