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HMRC internal manual

General Insurance Manual

Taxation of the investment return: investment gains: accounting periods beginning on or after 1 January 2002: transition from realisation basis: transitional measures

FA02/S65 and FA02/S66 ease the transition for insurance companies in the accounting period in which they begin to follow mark to market for tax purposes.

Retention of the realisation basis until 31 December 2001

FA02/S65 permits retention of the realisation basis until periods beginning on or after 1 August 2001, that is, until 31 December 2001 for companies with a 31 December year end.

Section 65 does not apply if a company changes the accounting date of its period of account beginning on or after 1 January 2001 in an attempt to postpone the requirement to use mark to market, unless the change of date was notified to the Registrar at Companies House (or its equivalent overseas) before 17 April 2002 (Budget Day) - FA02/S65 (4).

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Retention of the realisation basis for assets held at 1 January 2002

FA02/S66 further eases the transition by enabling those companies to elect for further postponement in bringing profits and losses into account. They can elect to retain the realisation basis for all assets held at 1 January 2002.

If FA02/S65 has had effect to postpone the advent of mark to market, FA02/S66 permits the company to elect to apply it only to assets acquired after 1 January 2002, and this date is fixed whatever the company’s period of accounts. The election had to be made within 12 months of the accounting period current on 1 January 2002, so that a company with a calendar year period had until 31 December 2003 to elect. See GIM5110 for the treatment of exchange gains and losses in periods beginning before 1 October 2002 and GIM5120 for later periods.

Under IAS 39, Recognition and Measurement of Financial Instruments, financial concerns including general insurers may designate non-derivative financial assets on first recognition as ‘available for sale’ (AFS). Such assets are measured at fair value, but changes in value are recognised directly in reserves rather than being taken through the profit and loss account. Generally, a computational adjustment would be required to recognise the value changes for tax purposes, under ICTA88/S472A. However, AFS is considered to fall within the mark to market definition of FA02/S66 (2) and may thus benefit from the transitional arrangement described above. No computational adjustment is in that case required to bring into account any valuation differences where ICTA88/S66 election applies to maintain the realisation basis.

IAS 39, Recognition and Measurement of Financial Instruments, provides a comprehensive standard for the measurement of financial assets and liabilities. In December 2004, the Accounting Standards Board issued FRS 26 which follows IAS 39. There were some transitional arrangements but it applies in full to all companies that use fair value accounting from 2006 on.

Where IAS 39/FRS 26 applies, certain assets and liabilities must be measured on fair value lines, what is otherwise called mark to market basis. This applies to

  • assets and liabilities held for trading
  • assets and liabilities designated at the outset as fair value through P&L
  • other assets (‘available for sale’) that are not ‘loans & receivables’ or ‘held to maturity’
  • all derivative financial instruments
  • any part of a hedged asset or liability where the hedging instrument is fair valued.

Where FRS 26 does not apply, the existing accounting treatment will be followed for tax purposes. This might have been authorised mark to market or authorised accruals, which in general follows the realisation basis but with recognition of impairment through the bad debt rules. The tax rules (ICTA88/S472A) depart from the normal principle of focusing on profit and loss account by taking into account items taken to reserve, necessitating a computational adjustment.