MTT21250 - Calculating the effective tax rate: Adjusted profits: Election to use realisation principle

A group may elect to use the realisation principle to determine certain gains and losses.

By electing to use the realisation principle, a member ensures that its adjusted profits only reflects a gain or loss in respect of an asset or liability when the asset or liability is disposed of. A gain or loss associated with a change in market value or an impairment is not to be included in the member’s adjusted profits.

The group may choose for the realisation principle to apply to either:

  • all assets and liabilities that are subject to fair value or impairment, or
  • tangible assets that are subject to fair value or impairment.

This election is made in respect of a territory and can apply (at the choice of the group) to either:

  • all of the members in that territory, or
  • all of the investment entities in that territory.

This election is a long-term election. See MTT52200 for guidance on making elections.

This election is set out in section 161 of Finance (No.2) Act 2023.

Effect of election

Where the election applies to a member:

  • the underlying profits must be adjusted to exclude unrealised gains and losses of the assets and liabilities to which the election applies, and
  • the carrying value of those assets and liabilities will be the carrying value at the later of:
    • the commencement of the first accounting period to which the election applies, or
    • the time the asset was acquired, or the liability was incurred.

Revocation of election

Where an election is revoked (see MTT52200), the underlying profits for each member that was subject to the election should be adjusted in the first accounting period to which the election no longer applies (the ‘revocation period’). In effect, this reverses the adjustments that have been made in the previous periods where the election applied.

An adjustment is required for each asset or liability that was affected by this election and remains held by the member at the beginning of the revocation period.

The amount of that adjustment will be the difference between:

  • the fair value of the asset or liability at the start of the revocation period, and
  • its carrying value (as determined under the election).

Where the fair value exceeds the carrying value, the amount will be added to the underlying profits.

Where the fair value is less than the carrying value, the amount will be subtracted from those profits.