Other tax rules on corporate finance: change of accounting basis: TACV - amounts in OCI
CTA09/S465B and S702
From accounting periods beginning on or after 1 January 2016, the tax treatment of loan relationships and derivative contracts follows the amounts recognised in profit or loss. Amounts recognised in other comprehensive income (OCI) are not immediately brought into account under the loan relationship and derivative contract rules. Such amounts will be brought into account when the amounts are recycled to profit or loss, or on derecognition of the instrument where the amounts are not recycled.
S308 and S320A complement each other in that any amounts that are treated as being ‘in OCI’ in respect of a loan relationship must either be brought into account by S308 or S320A.They operate together to ensure that any amounts that are in OCI will be brought into account in the future. Similarly S597 and S604A complement each other for amounts recognised in OCI in respect of derivative contracts.
As a result, where part of the carrying value of the loan or derivative relates to amounts that will be brought into account for tax purposes in the future then the carrying value will need to be adjusted to remove these amounts in determining the tax-adjusted carrying value (TACV) of the loan or derivative in question.
Example 1: Available-for-sale
A company holds a loan receivable that is accounted for as an available-for-sale (AFS) asset under IAS 39. Its carrying value is £120,000 (asset) and £20,000 in respect of it has been recognised in OCI (such that the £20,000 has increased the carrying value of the asset and was credited to OCI). The amount recognised in OCI in respect of this instrument has not been taxed and needs to be removed in calculating the TACV. So in this case the TACV of the loan will be £100,000.
The £20,000 that has been recognised in OCI (and forms part of the accounting carrying value of the asset) is an amount that is to be brought into account for tax purposes in the future under S308(1A) or S320A.
Example 2: Own Credit Risk
A company has a loan liability with a face value of £25m that is accounted for at fair value through profit or loss (FVTPL). Its carrying value is £22m (liability) reflecting its fair value. Under IFRS 9, the company has recognised credit amounts of £2m to OCI in respect of movements in the company’s own credit risk (which has the effect of reducing the carrying value of the liability).
The amount recognised in OCI in respect of this instrument has not been taxed and needs to be adjusted for in calculating the TACV. In this case the TACV will be £24m. The £2m that has been recognised in OCI (and forms part of the accounting carrying value of the asset) is an amount that is to be brought into account for tax purposes in the future under S308(1A) or S320A.
Changes in accounting policy
In identifying the amounts that have been recognised in OCI, the tax rules typically assume that the accounting policy that the company is currently adopting has always applied. In other words, you should follow what is shown in the accounts under the current accounting policy as being an amount ‘in OCI’. The fact that this amount has arisen as a result of the application of a change in accounting policy does not matter.
Further guidance on the calculation of the TACV: