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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: change of accounting policy: cases where there is a prior period adjustment

Prior period adjustment

For periods beginning on or after 1 January 2005, amounts brought into account for tax purposes under the Loan Relationships and Derivative Contracts legislation are computed in accordance with generally accepted accounting practice, as required by CTA09/S307 for loan relationships, and CTA09/S595 for derivative contracts.

Generally accepted accounting practice means IAS or UK GAAP. See CFM33070 for more on generally accepted accounting practice for loan relationships and CFM51070 for derivative contracts. CFM33140 has the basic computational rules for loan relationships where a company adopts a new accounting policy for the first time.

CTA09/S308 and S597 bring in amounts recognised in the accounts, whether they are in

  • the profit and loss account/income statement,
  • the statement of total recognised gains and losses/changes in equity, or
  • elsewhere in the accounts.

Where the accounts include a Prior Period Adjustment (PPA) CTA09/S308(2) and CTA09/S597(2) ensure that any PPA, wherever it appears in the accounts, is taken into account for tax purposes. Such adjustments may occur when the change is within IAS, FRS 101 or FRS 102.

CTA09/S308(2) and CTA09/S597(2) do not apply to any PPA that is a result of a fundamental error. In the case of fundamental errors, UK tax law requires prior periods to be restated. That approach continues to apply.

CTA09/S350 to S351 ensure that where the connected party rules at CTA09/S349 apply to require the parties to a loan relationship that become connected to depart from the accounting basis actually used, or to resume following the basis actually used when they cease to be connected, debits and credits do not fall out of account because of the change required for tax purposes.


Company B, a subsidiary of Company A, makes a loan to a third party company (Company C) in period 1 and uses fair value accounting.

Company A acquires Company C in period 2.

So Companies B and C are connected in period 3 so that CTA09/S349 requires tax to be computed using the amortised cost basis.

The fair value at the end of period 1 may well differ from the amortised cost at beginning of period 2. CTA09/S350 ensures these differences are brought into account in period 2.