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HMRC internal manual

Corporate Finance Manual

Deemed loan relationships: money debts other than discounts: trade debts: use of fair value accounting

Use of fair value accounting

The restriction on writing down trade debts described in CFM41040 does not apply where fair value accounting is used. ‘Fair value accounting’ includes not only the use of mark to market accounting under ‘old UK GAAP’, but the situation where the money debt is the hedged item in a fair value hedge (CFM27000). Neither does it affect exchange gains or losses.

Fair value hedge example

A company supplying fitted kitchens offers credit terms to retail customers. Under the credit agreement, the customer pays interest at a fixed rate. In order to hedge changes in the fair value of its portfolio of credit agreements arising from fluctuations in interest rates, the company enters into an interest rate swap, effectively converting the debt from fixed to floating rate. It designates a fair value hedge of interest rate risk, with the credit agreement portfolio as the hedged item and the swap as the hedging instrument.

The effect of using hedge accounting is that changes in the fair value of the portfolio, in so far as they relate to interest rate changes, are taken to profit and loss account. But no adjustment is made to the fair value of the portfolio for any other reason, for example if the credit status of the customers changes.

Arguably, the carrying value of the money debts in the company’s balance sheet is not ‘fair value’ as defined in CTA09/S313. HMRC take the view, however, that company is using fair value accounting for the asset. If interest rates rise and amounts are debited to profit and loss as the fair value of the asset decreases, CTA09/S324 does not preclude the company from obtaining relief.