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HMRC internal manual

Corporate Finance Manual

Accounting for corporate finance: Old UK GAAP excluding FRS 26: lenders: Companies Act

This summary applies to companies other than banking and insurance companies and those that apply IFRS, New UK GAAP or FRS 26 under Old UK GAAP.

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

although 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.