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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: change of accounting basis: overview


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 either (i) changes its accounting policy; or (ii) is required by statute to change its accounting treatment.

It applies in particular to transitions arising from:

  • the introduction of FRS 26 (from 2005 through to 2014)
  • the introduction of IAS 39 (from 2005 through to 2017)
  • the introduction of FRS 101 or FRS 102 (from 2015)
  • the introduction of IFRS 9 (from 2018)

It also applies where tax legislation overrides the accounting treatment adopted by the company. For example, where a loan accounted for at fair value is brought within the connected company provisions at CTA09/S349 which require it to be accounted for at amortised cost.

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


A company invests in a bond for £100,000 which it held at amortised cost in its accounts under Old UK GAAP. From 1 January 2015 it adopts New UK GAAP and, due to the particular terms of the bond, the company is required to hold the bond at fair value. The fair value of the bond on that date is £90,000. The bond falls to be worth £85,000 during the year to 31 December 2015, as a result of which the company recognises a fair value loss of £5,000. At this point it decides to dispose of the bond for its fair value of £85,000.

Overall the company has incurred an economic loss of £15,000. However, the accounts of the company have only recognised an accounting loss of £5,000 in the income statement. The remaining £10,000 has not been recognised in the income statement due to the change of accounting. As a result, the tax rules apply to bring into account a debit of £10,000 by way of a transitional adjustment to reflect the change in the value of the loan on adoption of the new accounting treatment. Otherwise there would be a risk of amounts never being relieved. 

Specialist tax rules

Careful consideration will need to be given where tax rules override the accounting treatment. For example:

  • The loan relationship rules require the use of amortised cost for connected party loan relationships (see CFM35170).
  • Gains and losses on certain hedging instruments should be disregarded under the Disregard Regulations 2004 (see CFM57000).

In addition, it should be noted that since 2016 the loan relationship and derivative contract rules follow the amounts recognised in profit or loss; amounts in Other Comprehensive Income (OCI) are not immediately brought into account for tax.

Particular care therefore needs to be taken where, under either the old or new accounting basis, amounts are recognised for accounting purposes in OCI (See CFM76045).

The COAP Regulations

The Change of Accounting Practice (COAP) Regulations 2004 apply rules for dealing with the transitional adjustments for loans and derivatives. In particular, they:

  • Spread the transitional adjustments over a longer period. In most cases these amounts are spread over ten years, but in some cases amounts are spread over five years or are not spread at all (see CFM76090).
  • Exclude certain transitional adjustments from being brought into account at all (see CFM76100).

The COAP Regulations only apply in respect of adjustments arising from the company adopting a new accounting policy. They do not apply to a change in tax basis arising from the application of tax legislation (such as the connected party loan relationship rules).

Papers for the adoption of FRS 101 and FRS 102

Further details on the accounting requirements on transition to FRS 101 or FRS 102 can be found in the [two overview papers ]( have been prepared by HMRC.