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HMRC internal manual

Corporate Finance Manual

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Loan relationships: connected companies and impairment: debtors: deemed releases of impaired debt: where holders of impaired debt become connected: connection on or after 1 April 2012: examples

CTA09/S362: creditor and debtor become connected on or after 1 April 2012: example 1

C Plc owns £10m worth of bonds issued by D Ltd and accounts for them at fair value. C Plc and D Ltd are not connected.

C Plc ends its accounting period on 31 December and at 31 December 2012 the fair value of the bonds was £8m.

C Plc acquires a majority shareholding in D Ltd on 1 July 2013 and so the companies become connected.

C Plc must now account for the loan relationship on an amortised cost basis (CTA2009/S349). As it accounted for the asset on a fair value basis in its last accounting period CTA2009/S350 will apply and it will bring in debits or credits depending on whether the fair value exceeds the amortised cost or vice versa.

The cost of the asset on an amortised cost basis on 31 December 2012 was £7.5m, reflecting impairment recognised in C Plc’s accounts up to that date. Since the fair value exceeded the amortised cost C Plc will bring in a debit of £0.5m (£8m - £7.5m) under CTA2009/S350.

As the companies have become connected the pre-connection carrying value (PCCV) in C Plc and D Ltd are compared:

  • D Ltd has accounted for the liability on an amortised cost basis and the amount recognised in its financial statements in respect of the liability immediately before the companies became connected (its PCCV) on 1 July 2013 was £10m
  • C Plc has a PCCV of £7.5m since this is the cost of the asset on an amortised cost basis of accounting on the last day of the period of account ending immediately before the one in which the companies became connected.

Under CTA2009/S362 there is therefore a deemed release of £2.5m (£10m - £7.5m).

CTA09/S362: creditor and debtor become connected on or after 1 April 2012: example 2

The facts are the same as in example 1 except that C Plc acquires the bonds on the open market on 1 February 2013 for £7m. At the time of the acquisition and immediately after C Plc and D Ltd are not connected so there is no deemed release under CTA2009/S361.

Since C Plc did not own the bonds at the end of its last accounting period the PCCV for C Plc will be the consideration it paid for the bonds.

As D Ltd still has a PCCV of £10m the deemed release will therefore be £3m (£10m-£7m).

Note that since C Plc did not hold the bonds in the previous accounting period there is no adjustment required under CTA2009/S350.