CFM17550d - Repos: FA 2007 rules for companies: creditor 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
Example: Creditor quasi-repos
(
CFM17534a explains why both C and D
have a creditor quasi-repo in this case.)
Transaction
As in
CFM17534a:
- 1/1/09: A sells securities to C for 100.
- 30/4/09: C novates its rights and obligations under the repo to D (also a lender), for which it receives 102 from D. This represents the advance of 100 made by C, plus a finance return of 2 (4 months at 6% per annum).
- 30/6/09: A purchases the same or similar securities from D for 103. This includes a further finance return of 1 (2 months at 6% per annum).
Treatment of C
| Accounting entries, in accordance with GAAP
In addition to the entries at CFM17534a: |
|
| 1/1/09-30/4/09 (repo “interest”
accrual):
| Dr Financial Asset 2; Cr P&L 2 (the financial asset which has increased to 102 is reduced to nil by receipt of the novation payment on 30/4/09) |
| Net Profit and Loss result: | Credit 2: “interest” |
Tax Treatment
C’s finance return of 2 is treated as interest for loan
relationships purposes (
CFM17544).
Treatment of D
| Accounting entries, in accordance with GAAP
In addition to the entries at CFM17534a: |
|
| 30/4-30/6/09 (repo “interest” accrual):
| Dr Financial Asset 1; Cr P&L 1 (the financial asset which has increased to 103 is reduced to nil by receipt of the repurchase price on 30/6/09) |
| Net Profit and Loss result: | Credit 1: “interest” |
Tax Treatment
D’s finance return of 1 is treated as interest for loan
relationships purposes (
CFM17544).
Further point to note
This transaction corresponds to the debtor
repo example referred to in the footnote to
CFM17528a (if A is a company).
