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HMRC internal manual

Corporate Finance Manual

Loan relationships: computational rules: generally accepted accounting practice (GAAP)

Computational rules and accounting methods

CTA09/S307(2) sets out the ‘general rule’ that loan relationship credits and debits to be brought into account are the amounts that, in accordance with generally accepted accounting practice (GAAP), are recognised in determining the company’s profit or loss for the period, subject only to certain specific statutory overrides. The definition of GAAP at FA04/S50 was amended to include International Accounting Standards, for periods beginning on or after 1 January 2005, and applies whether or not the company has adopted IAS 39 or FRS 26. ‘Generally accepted accounting practice’ therefore means UK GAAP or IAS.

Periods of account starting before 1 January 2005

The loan relationships legislation originally specified that the credits and debits brought into account for corporation tax purposes were to be determined using one of two ‘authorised accounting methods’, either accruals or mark-to-market, which conformed to

  • generally accepted accounting practice (GAAP), and
  • the specific requirements of the legislation for that particular method.

FA 2004 introduced changes to the loan relationships rules to accommodate accounts prepared using IAS 39 or FRS 26 (CFM21500+). There were two main reasons for this change.

  • FRS 26 (or IAS 39) provides, for the first time, a comprehensive standard for the measurement of financial instruments, and there is no longer any need to spell out what is acceptable accounting.
  • In any case, the former provisions on authorised accounting methods did not cater for the use of FRS 26 or IAS 39. A company may measure different parts of the same loan relationship in different ways - for example, where a creditor loan relationship is accounted for as an available for sale asset (CFM21590), interest and amortisation of any discount will be accounted for through the profit and loss using an effective interest method, while fair value changes are taken to equity.

Periods of account starting on or after 1 January 2005

The changes made by FA 2004 have effect for periods of account (not accounting periods) beginning on or after 1 January 2005.

For example, suppose that a company prepares accounts for an 18-month period beginning on 1 October 2004 and ending on 31 March 2006. It will have accounting periods from 1 October 2004 to 30 September 2005, and from 1 October 2005 to 31 March 2006. But the next loan relationships rules will only apply from 1 April 2006, the start of its next period of account.

Some companies did not adopt FRS 26 (or IAS 39) in 2005, but continued until 2006 or 2007 to account for their financial instruments in accordance with UK GAAP as it stood before 1 January 2005. Small companies using the FRSSE are unlikely to make any change at all in the way they account for their loan relationships. The amended rules nevertheless apply to these companies - although in practice the changes are unlikely to make much difference to small companies.