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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: Change of accounting policy: overview

First time adoption

This section of the Corporate Finance Manual explains the transitional adjustments that arise for tax purposes in relation to loan relationships and derivative contracts where a company adopts a new accounting policy. It applies in particular to transitions from Current UK GAAP to IAS, FRS 101 or FRS 102.

It also applies for example to the transition to FRS 26 prior to the introduction of FRS 101 and FRS 102 (New UK GAAP). 

The relevant legislation is at

  • CTA09/S308 (previously FA96/S85B) and CTA09/S315 to S319 (previously FA96/SCH9/PARA19A) for loan relationships;
  • CTA09/S597 (previously FA02/SCH26/PARA17B) and CTA09/S613 to S615 (previously FA02/SCH26/PARA50A) for derivative contracts.

This legislation ensures that adjustments arising on transition are brought in for tax purposes.

Certain of these transitional debits and credits are then deferred, or may be excluded from the charge to tax. These rules are set out in the Loan Relationships and Derivative Contracts (Change of Accounting Practice) Regulations 2004 (the COAP Regulations). These regulations apply for both loan relationships and derivative contracts.

Transitional adjustments - general

Adjustments on loan relationships as a result of changes in accounting policy can arise under two separate parts of the regime.

Prior period adjustments

In cases where a company stays within the same accounting framework, or otherwise does not restate its opening figures, the accounts will normally show a prior period adjustment (PPA) either in reserves or in equity. See CFM76020.

No prior period adjustment

In some cases there may be no PPA even though there is a change in accounting measurement for a particular instrument. For example, no PPA will be recognised where there is a change to the overall accounting framework and the opening figures have been restated. This will often be the case where a company adopts IAS, FRS 101 or FRS 102 for the first time. See CFM76030.

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Accounting treatment

Further details on the accounting requirements on transition to FRS 101 or FRS 102 can be found in the two overview papers (HMRC website) (external users can find the guidance at that have been prepared by HMRC.