CFM98370 - Interest restriction: commencement rules: group mismatches

The Group Mismatch Regulations address two situations where timing differences can arise between the way amounts are recognised in the group’s financial statements and how they are recognised for accounting purposes by any member of the group.

They affect the calculation of adjusted net group-interest expense used in the fixed ratio debt cap and the qualifying net group-interest expense used in the group ratio method.

Fair value accounting or adjustments

The first situation concerns the case where, on commencement of the rules, a loan relationship is recognised in the group’s financial statements such that:

  • it is subject to fair value accounting or fair value adjustments as part of a fair value hedge in the group’s accounts; and
  • it is recognised at the amortised cost basis of accounting in the financial statements of the issuer company.

In this case, the financial statements for the worldwide group are treated as being prepared on the basis that they recognise the loan relationship on the amortised cost basis of accounting (without any adjustments being made for a fair value hedge).

Debt buy-backs

The second situation concerns the case where the group had an external loan that was bought into the group prior to commencement of the rules, but where it still exists as between two group members.

There is likely to be a gain or loss on the ‘redemption’ of the loan from the group accounts perspective. However, at the entity level the two companies will record the loan at different carrying values. The effect of this is that no gain or loss is typically recognised at the entity level at the time the debt is bought into the group. Instead the gain or loss is recognised gradually over the remainder of the term of the debt as a differential in the effective interest rate on the two sides of the loan.

In this case, the financial statements of the worldwide group are treated as being prepared on the basis that the gain or loss on the derecognition of the loan is spread over the remainder of the term of the loan, on a just and reasonable basis.