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HMRC internal manual

Corporate Finance Manual

Old rules: loan relationships: authorised accounting methods: mark to market

Using mark to market

This guidance applies to periods of account beginning before 1 January 2005

Only certain types of companies can use mark to market to account for any loans and debt instruments. These will mostly be banks, insurance companies and investment funds.

Mark to market means that the company’s balance sheet shows loans and debt instruments at their fair value, which may be higher or lower than cost. Any profits or losses due to changes in value will go to the profit and loss account or to reserves.

No accounting standard prescribes the use of mark to market accounting, which was regarded historically as involving an inappropriate anticipation of profits. However, accounts must give a ‘true and fair view’ of the financial position of a company, and mark to market is now seen as giving a better view in some situations, particularly where there is a liquid market in the security involved. Some Statements of Recommended Practice (SORPs) specifically recommend mark to market for some debt, for example securities on a bank’s trading book. In insurance business, the Companies Act and the relevant SORP both require mark to market.

Issues that companies and HMRC officers may need to consider are:

  • should the company be using mark to market?
  • if so, is it using an authorised mark to market basis for tax purposes?