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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: Change of accounting policy: ‘prescribed’ debits and credits

‘Prescribed’ debits and credits

Prescribed debits and credits are set out in Regulation 4 and are those arising:

  • under the ‘normal’ change of basis rules where there is a Prior Period Adjustment (PPA) (see CFM76020); or
  • where there is no PPA but there is a difference between the carrying value at the end of the last period of the old accounting policy, and the carrying value at the start of the first period of the new accounting policy (see CFM76030).

However, this excludes amounts set out in Regulation 4(3) and 4(4).

Regulation 4(3): Loan relationships

Regulation 4(3) covers loan relationship debits or credits which arise under the Change of Accounting Practice Regulations in the same period as that in which the asset or liability falls to be fully discharged. This is the latest date, under its terms, in which it falls to be fully repaid or redeemed, and not just because it is repaid early.

Regulation 4(4): Derivative contracts

Debits and credits arising on derivative contracts to which the company is party in one of two circumstances.

Regulation 4(4)(a) - where the company is treated as a party to the contract by s94A(2)(b) FA 1996 (now CTA09/S585(2)) and the corresponding loan relationship is one to which Regulation 4(3) applies. This ensures that where a loan relationship with an embedded derivative is ‘bifurcated’, and for tax purposes is treated as a loan relationship and a derivative contract (see CFM37610), the derivative component is treated in the same way as the loan relationship. If the security as a whole matures within the same accounting period, and a transitional debit or credit on the loan relationship is wholly brought into account in the period, the same will apply to the derivative.

Regulation 4(4)(b) - debits and credits arising on derivative contracts not covered by the Disregard Regulations but which hedge loan relationships to which Regulation 4(3) applies . This ensures parity of treatment between a loan relationship that matures within the period, and any derivative that hedges it. See CFM57000 for more on the Disregard Regulations.