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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: computational rules: credits and debits not brought into account: impairment

Impairment losses

IAS 39 and FRS 26 require companies to assess their financial assets at each balance sheet date to see whether there is objective evidence that a financial asset, or group of assets, is impaired. Where loans or trade debts are concerned, this is a similar - but not identical - process to making a provision for bad or doubtful debts at the year end.

The standards lay down precise rules for identifying and measuring impairment losses. There is more detail on the process at CFM21670. Except for assets accounted for at fair value through profit and loss (where any impairment will be swept up into the overall fair value change), impairment losses are recognised in the profit and loss account, as is any credit resulting from reversal of an impairment loss.

Tax treatment

If the company correctly applies the relevant standard to arrive at a debit for impairment losses (or a credit for reversal of impairment losses), the debit will be allowable (or the credit taxable) in accordance with the normal computational provisions of CTA09/S307 (CFM33070).

This applies to trade debts (including debts relating to a property business), as well as to loan relationships, since CTA09/S469 brings impairment losses, and reversals of such losses, on such money debts into the loan relationships regime - see CFM41000+.

The main exception to following the accounting treatment on impairment is where the debt is between connected parties (CFM35000+).

In periods of account beginning before 1 January 2005, the authorised accruals basis of accounting required the company to assume that every amount under a creditor loan relationship was payable in full, unless a departure from that assumption was specifically permitted. Departure from the assumption (‘bad debt relief’) was allowed only where a debt was bad or doubtful. CFM80200.

This provision does not apply to periods of account beginning on or after 1 January 2005. In some cases, this means that a company’s allowable impairment losses will exceed the relief that was claimed under the previous rules. This is because, under IAS 39 or FRS 26, recognition of impairment losses is not restricted to cases where the creditor feels a default is probable (or where it has already occurred). An impairment loss may be recognised where there is data indicating that the estimated future cash flows from a group of assets will decrease.

Impairment: example

A bank has statistical evidence, based on data gathered over a number of years, that a rise in mortgage rates correlates with an increase in credit card default by customers with a poor credit history. In 2007, mortgage rates increase, and the bank recognises an impairment loss - calculated in accordance with the statistical data - on its portfolio of credit card debts owed by this customer group. The impairment loss - provided it is correctly calculated - accords with IAS 39, even though it cannot be identified with individual amounts owed by individual customers, and it will be allowable for tax purposes.