Debt Cap: the available amount: conditions for fair value mismatches
Fair Value Adjustments - regulations 3 and 4
Regulations 3 and 4 of the Mismatch Regulations corrects difference between the financing expense or income of a company and financing expense amounts within the available amount that arise from fair value accounting. Although the Regulations refer to amounts brought into account as loan relationships under CTA09/PT5 in practise they also include loan debits under CTA09/PT3 (trading income).
Regulation 4 sets out four conditions which have to be met for regulation 3 to apply;
- the relevant group company is party to a relevant financial relationship in the period,
- that a debit in relation to the relevant financial relationship is a financing expense amount of that company,
- that an amount in respect of the relevant financial relationship is included in the available amount
- that a fair value adjustment is made in relation to the relevant financial relationship by the relevant group company in the relevant accounting period.
Where a relevant financial relationship meets the conditions in regulation 4, regulation 3 will apply to adjust the available amount.
Regulation 3 does this by comparing the relevant financial relationship in the consolidated accounts of the worldwide group (amount A) with the net amount that is brought into account as a loan relationship in the UK company’s accounts in respect of the relevant financial relationship. It should be noted that the net amount brought into account is after any adjustments for tax purposes.
Where amount A is greater than amount B regulation 3 works by excluding from the available amount the lower of the amount of the fair value adjustment or the amount of the excess. Where amount B is greater than amount A regulation 3 operates to include within the available amount the lower of the fair value adjustment and the amount of the excess.