Debt cap: gateway test: definition of relevant assets
This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.
What are relevant assets for the purpose of calculating the UK net debt amount
The term relevant assets is only used to identify amounts that are used in the calculation of the UK net debt. Relevant assets play no part in the calculation of the worldwide gross debt. The relevant assets of a relevant group company or group securitisation company at any particular date are assets that are disclosed in the balance sheet for that date (or would be if a balance sheet were to be prepared). The term is defined by TIOPA10/S263(4) as being
- cash and cash equivalents
- lending (whether by way of overdraft or other short-term or long-term loan)
- net investments, or net cash investments, in finance leases
- UK or foreign government securities
- securities issued by UK or foreign public or local authorities
- securities issued by any company or other body of persons
- quasi loans
TIOPA10/S263(9) explains that the first three terms take their meaning from generally accepted accounting practice, which CTA10/S1127 defines as either IAS or UK GAAP. The expression ‘lending’ is not specifically defined; neither IAS not UK GAAP have a specific definition of what constitutes amounts lent or deposited. However accounting standards clearly expect loans, deposits and overdrafts to be identified and if appropriate, specifically presented in financial statements (either at the consolidated or sole company level).
‘Lending’ also includes an investment in corporate bonds, either as an original investor in the bond or by the acquisition of the security from another investor.
The term ‘net investment in a finance lease’ is a term used in IAS to express the capital element of the finance loan, or the amount loaned. The term ‘net cash investment’ is a term used by UK GAAP and means much the same thing.
The company’s own share capital and any shares or equity interest it has in any other entity are excluded from being financial assets see TIOPA10/S263 (5)).
Non-financial services groups are likely to have a small number of assets that would be treated as a relevant asset. The most likely relevant assets that their relevant group companies will have will be deposits of surplus cash and intra-group loans.
TIOPA10/S263(4)(e) provides that relevant assets also include arrangements that are not short term or long term borrowing or finance leases but are:
- Financial assets; that
- Produce a return that is economically equivalent to interest (see CFM90715); and
- Are not short term.
This allows arrangements that have the same economic effect as loans, but are not legally loans, to be taken into account as relevant assets.
Service Concession Arrangements (PFI contracts)
For example where the operator of a PFI contract applies IFRS, following IFRIC Interpretation 12, ‘Service Concession Arrangements’, it may recognise a financial asset on its balance sheet. This will be the case where the arrangement is such that the operator has an unconditional contractual right to receive cash for construction services and the public sector ‘grantor’ has little or no discretion to avoid payment; usually the agreement is enforceable by law. This payment might be the whole of the payment or a payment to make up for a shortfall of amounts received from paying users of the public service. A financial asset may be recognised, even if payment is contingent on the operator ensuring that the infrastructure meets specified quality or efficiency requirements.
Where the operator company derives a return from this financial asset that is economically equivalent to interest it would meet the conditions to be a relevant asset in the context of the debt cap gateway test. The question of whether there is no practical likelihood of the return not being produced (S263(6)(c) and see CFM90718) is tested at the time the contract is entered into – the ‘relevant time’ in S263(7) and the requirement to meet specified quality or efficiency requirements should not prevent this requirement being met.
On the other hand if the contractor gains a licence to charge the public users and shortfall is not made up, the contractor recognises an intangible asset, which clearly would not be a gateway test relevant asset. Sometimes both elements may be present.
Relevant assets of banks and other financial institutions
While all groups may have surplus cash to invest in securities of all types (including equities) and financial instruments from time to time, banks and financial services companies will hold such securities and instruments as part of their business. Where such securities are held as trading assets or current asset investments or the equivalent, they are cash equivalents and therefore relevant assets. However, if the worldwide group qualifies as a financial services group under TIOPA10/S266 it need not apply the gateway test (see CFM90800 onwards).