CFM33275 - Loan relationships: core rules: special rules where a company is not or has ceased to be party to a loan
CFA09/S330A-330C
This guidance applies to accounting periods beginning on or after 1 January 2016.
Overview
These rules, enacted in F(No.2)A 15, deal with circumstances where amounts may be recognised in accounts in respect of a loan relationship even though, from a legal perspective, the company is not party to the loan relationship. They replace rules formerly in S331 (CFM33280) and S332 (CFM33290).
The rules are framed by reference to a "qualifying relationship" which is either a loan relationship or a relationship that would be a loan relationship, were a company a party to it. So, for example, if a debt security which would be a creditor loan relationship in the hands of a company is repo'ed to an individual, S330A -330C can still be in point.
Conditions
Amounts that would not otherwise be taken into account under CTA09/PT5 are taken into account if any of the four conditions A to D are met.
Condition A - company formerly a party to a loan relationship
This condition is satisfied where:
- a company was previously a party to a loan relationship,
- amounts in relation to the loan relationship were recognised in the company's accounts as items of profit or loss, and
- amounts continue to be so recognised.
The continuing amounts may relate to the loan relationship itself, for instance where under a repo or similar transaction in relation to a debt security (creditor loan relationship), the company does not derecognise the asset, but continues, under GAAP, to recognise amounts (such as interest accruing on the debt) because it, in effect, remains the economic owner.
Condition B - transfers of risk and reward
Parties may enter into contractual arrangements that transfer all or part of the risk and reward for being party to a debt, without a legal transfer of the debt itself. Where this happens, the debt may for accounting purposes be wholly or partially derecognised (or not recognised) by one party and wholly or partly recognised by another.
Such transaction would not always lead to derecognition; depending on the facts and circumstances arrangements it might not cause the loan relationship to be derecognised.
An example might be a defeasance transaction where one company agreed to take over the obligation to service a debt, but without a novation of the debt. (For novation see CFM33050.) In that event S330A would enable the party to whom the obligation was transferred to take into account amounts arising from serving the debt.
Condition C - there has been a related transaction and a company has ceased to be a party to a loan relationship
The scenario is similar to that in Condition A in that a company is no longer a party to a loan relationship, but Condition C relates to amounts recognised in the company's accounts in respect of a related transaction involving that loan relationship, rather than the former loan relationship itself.
Most obviously, the amounts recognised may arise from the related transaction that leads to the company ceasing to be party to the loan relationship in question. Under more recent GAAP, for instance FRS 102 or IFRS, this is less likely to arise than in the past. An example might be spreading a gain on a refinancing transaction over the remainder of the original lifetime of the refinanced debt, instead of recognising all of it immediately. This was fairly common under Old UK GAAP (excluding FRS26).
Condition C might also be satisfied where a company has repoed a security (but still recognises it as a financial asset under GAAP) and at the termination of the repo, or before its expected termination, the security is redeemed or sold. The repo counterparty would return the proceeds of redemption or sale or some other replacement asset. If this leads to derecognition of the security in the accounts of the original holder of the security (the economic holder) and a gain or loss on derecognition is taken into account in its accounts, in accordance with GAAP, the company must bring that amount into account under CTA09/PT5.
Condition D amounts brought into account where a company may become a party to a loan relationship or related transaction, but before it does so.
This condition deals with amounts recognised in respect of a prospective loan relationship. But it excludes expenses incurred before a company becomes party to a loan relationship or abortive expenditure, where this already falls within S329 - see CFM33060.
Effect
Where any of conditions A to D are satisfied, amounts are brought into account as if the company had been party to the loan relationship for the whole accounting period and the amounts brought into account are those treated as items of profit or loss.
Exceptions
Loans and derivatives [s330A(1)(c)]
There is a general limitation to s330A in that it does not apply where the amounts in question are already being brought into account under the loan relationship rules or the derivative contract rules. [s330A(c)].
Rule against double debits [S330B]
A debit cannot be brought into account under S330A where it is:
- brought into account by another company under the loan relationship rules (CTA09/PT5); or
- brought into account in determining the assumed total taxable profits of a controlled foreign company (CFC) under CTA09/PT9A; or
- allowable as a deduction in computing the liability of a person to income tax
Avoidance of double charge [S330C]
S330C is to some extent a mirror of S330B, but requires a claim to be made by the "relevant company", that is required to bring into change amounts by S330A. For this to apply the amount to be brought into account under S330C must be
- brought into account by another company under the loan relationship rules (CTA09/PT5); or
- brought into account in determining the assumed total taxable profits of a controlled foreign company (CFC) under CTA09/PT9A; or
- an amount on which a person is chargeable to income tax
On the making of a claim under S330C, HMRC must make just and reasonable consequential adjustments, notwithstanding time limits that might otherwise apply.