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HMRC internal manual

Corporate Finance Manual

From
HM Revenue & Customs
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Loan relationships: connected companies: use of the amortised cost basis

Connected companies must use the amortised cost basis

The basic rule, set out in CTA09/S349, is that connected companies must use the amortised cost basis of accounting in computing loan relationships profits and losses. See CFM21640 for more on the amortised cost basis. Companies that use fair value accounting must therefore make adjustments in their tax computations.

However, even where companies are connected, fair value accounting must be used for

Change to amortised cost basis

Where companies begin to be, or cease to be, connected, and the company moves from fair value to amortised cost as the basis used for determining loan relationships profits and losses as a consequence, or vice versa, there are rules to ensure that no amounts fall out of account, or are counted twice.

Companies beginning to be connected

CTA09/350 requires a comparison of the fair value of the asset or liability (‘FVA’ and ‘FVL’ respectively), with the amortised cost of the asset or liability (‘ACA’ and ‘ACL’ respectively), at the end of the ‘earlier period’ - the last period in which fair value was used.

In the case of an asset, if FVA at the end of the earlier period exceeds ACA, the excess is brought in as a debit, at the end of the ‘later period’ - the first connected period in which amortised cost basis is used for loan relationships.

If ACA exceeds FVA, the excess is brought in as a credit at the end of the later period.

In the case of a liability, if FVL exceeds ACL, the excess is brought in as a credit.

If ACL exceeds FVL, the excess is brought in as a debit.

See the example at CFM35180.

Companies ceasing to be connected

Under CTA09/S351, the reverse procedure applies. A comparison is made of the amortised cost of the asset or liability (‘ACA’ and ‘ACL’ respectively) with the fair value of the asset or liability (‘FCA’ and ‘FVL’ respectively) at the end of the earlier period - the last connected period in which the amortised cost basis is used for loan relationships.

In the case of an asset, if FVA at the end of the earlier period exceeds ACA, the excess is brought in as a credit, at the end of the ‘later period’ - the period in which fair value is used.

If ACA exceeds FVA, the excess is brought in as a debit at the end of the later period.

In the case of a liability, if FVL exceeds ACL, the excess is brought in as a debit.

If ACL exceeds FVL, the excess is brought in as a credit.