CFM22010 - Accounting for corporate finance: UK GAAP before 1 January 2005: lenders: Companies Act
Companies Act
This summary applies to companies other than banking and insurance companies, and for banking and insurance companies for all loans except those covered by Schedules 9 and 9A of the Companies Act.
The Companies Act requires a loan to be recorded at the lower of historic cost and net realisable value. This is historic cost accounting.
The Companies Act and FRS 18 both require companies to draw up accounts on an accruals basis. An accruals basis reflects transactions in the period to which they relate rather than the period in which any cash involved is paid or received.
The Companies Act does not allow companies to record assets at market value (other than to write down the asset if its realisable value is lower), except as allowed by the Alternative Accounting Rules. These rules (which can be selected individually but will apply across the company’s whole class of the relevant assets) allow any of the following to be included at current cost
- intangible assets
- fixed assets
- investments
- stocks
though a company is not allowed to carry loans at market value or current cost unless they are classified as ‘investments’ or ‘fixed assets’. If applying these rules requires a revaluation upwards, the surplus is credited to the revaluation reserve, not the profit and loss account.
Schedules 9 & 9A of the Companies Act 1985
Schedules 9 and 9A of the Companies Act 1985 allow banking and insurance companies to record loans at current market value in certain circumstances.
For banking companies, this is limited to loans held as part of a trading portfolio, essentially transferable securities. For insurance companies, this is applied in more widespread situations and subject to detailed rules and limitations.
There are details in the respective Statements of Recommended Practice (SORPs), and where such accounting is required and acceptable the companies will adopt a mark to market accounting policy, including changes in market value as part of the current year’s profit and loss account.
