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HMRC internal manual

Corporate Finance Manual

Loan relationships: computational rules: credits and debits not brought into account: impairment where ‘old UK GAAP’ used

Impairment: companies using ‘old UK GAAP’

‘Impairment’ is defined in the loan relationships legislation only to the extent of making it clear that impairment includes uncollectability of a debt. It is not tied to the use of a particular accounting standard - a company that has adopted neither IAS 39 nor FRS 26 can still have an impairment loss.

Nevertheless, the rules on impairment in IAS 39 or FRS 26 should be used as a general guide to what ‘impairment’ means in the context of loan relationships. You should take a common sense view, tailored to the circumstances of the company.

A company using ‘old UK GAAP’ (or the FRSSE) may compute a provision for bad and doubtful debts in a way that follows, or substantially follows, the procedures in FRS 26. Such a provision will be allowable for tax purposes.

On the other hand, many smaller companies will continue simply to assess outstanding debts on an individual basis, without attempting to also assess whether groups of debts are impaired. Where such provisions have been accepted as reasonable in the past, they should continue to be accepted as allowable impairment losses in periods beginning on or after 1 January 2005.

A provision will not be an allowable impairment loss unless it is based on objective evidence that, as a result of some event or events, future cash flows from the debt or debts will be reduced. There must be an actual event - not just a prediction that something will happen in the future - and it must be possible to make a reliable estimate of the reduction in value of the debt.

CTA09/S324 prevents a company from getting relief for a write-down of a debt that is not an impairment loss - see CFM33210.