CFM17534a - 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
Examples: creditor quasi-repos
Transaction
Treatment of C
Treatment of D
Transaction
- 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, agreed at the outset (this includes a finance return of 2; see CFM17550d).
- 30/6/09: D sells the same or similar securities to A for 103, agreed at the outset (this includes a finance return of 1; see CFM17550d).
Treatment of C
| Accounting entries, in accordance with GAAP | |
| 1/1/09 (making of advance): | Dr Financial Asset 100; Cr Cash 100 |
| 30/4/09 (novation receipt from D): | Dr Cash 102; Cr Financial Asset 102 |
C does
not have a
creditor repo because it does not meet Conditions
D and E of the creditor repo conditions (
CFM17530): it is not entitled or obliged
to sell the same or similar securities, and its financial asset is
extinguished otherwise than by a sale of the securities.
C has a
creditor quasi-repo because all of the conditions
in
CFM17534 are met:
- Condition A: another person (A) receives an advance from C.
- Condition B: in accordance with GAAP, C records a financial asset in respect of that advance.
- Condition C: a person (A) sells securities.
- Condition D: the arrangement entitles or obliges another person (D) to sell those securities, and makes “other relevant provision”: under it, A’s liability to C is discharged by D’s subsequent sale of the securities.
- Condition E: in accordance with GAAP, the discharging of the liability extinguishes C’s financial asset in respect of the advance to A.
Treatment of D
| Accounting entries, in accordance with GAAP | |
| 30/4/09 (making of advance): | Dr Financial Asset 102; Cr Cash 102 |
| 30/6/09 (sale of securities): | Dr Cash 103; Cr Financial Asset 103 |
D does
not have a
creditor repo because Conditions A, B and C of the
creditor repo conditions (
CFM17530) are not met: the borrower (A)
does not receive an advance from D, D’s accounts do not
record a financial asset in respect of such an advance, and A does
not sell any securities to D.
D has a
creditor quasi-repo because all of the conditions
in
CFM17534 are met:
- Condition A: another person (C) receives an advance from D.
- Condition B: in accordance with GAAP, D records a financial asset in respect of that advance.
- Condition C: a person (A) sells securities to any person (C).
- Condition D: the arrangement entitles or obliges the lender (D) subsequently to sell those or any other securities.
- Condition E: in accordance with GAAP, D’s subsequent selling of those securities extinguishes its financial asset in respect of the advance made to C.
Further point to note
This transaction corresponds to the debtor repo referred to
in the footnote to the example at
CFM17508a (where A is a company).
