CFM33110 - Loan relationships: core rules: GAAP: changes in accounting basis

CTA09/S315-319

The provisions relating to changes in accounting basis were rewritten by F(2)A15. S315 and 316 set out a simple but comprehensible rule for dealing with a change in the "tax-adjusted carrying value" of an asset or liability arising either from a change in accounting basis, or a company's tax status that requires a change in the accounting basis to be applied for tax.

A slightly different rule in S318 applies where a company is no longer a party to a loan relationship, but amounts are recognised in its accounts as a result of a related transactions a change in accounting basis impacts those amounts.

Circumstances in which the general rule applies

S315 sets out the circumstances in which the rule in S316 is to be applied. This is where the following conditions are satisfied:

(A) There is a change in the accounting basis that a company is required from one period to the next.

(B) The change in basis to be applied arises because either:

• a provision within the loan relationships rules requires a particular basis of accounting to be applied for one period which differs from that applied in the immediately preceding period, or
• the company changes its accounting policy.

(C) The change in basis is not made to comply with amending legislation that did not apply to the earlier period.

(D) The accounting basis applied before the change (the old basis) must accord with the law or accounting practice applicable before the change.

(E) The accounting basis applied after the change (the new basis) must accord with the law or accounting practice applicable after the change.

Amending legislation would normally be expected to specify the transitional arrangements to be applied.

The general rule

The general rule, in S316, deals with what happens where there is a difference between:

• the tax-adjusted carrying value of an asset or liability at the end of one period (the "earlier period"); and
• the tax-adjusted carrying value of that asset or liability at the beginning of the immediately following period (the "later period).

If the change is in accounting policy, the rules will normally apply at the end of a period of account; if it results from a tax rule the rule will normally apply at the end of accounting period.

What is then required is that a credit or debit must be brought into account for the purposes of Part 5 for the later period of an amount equal to the difference. This amount is brought into account in the same way as a credit or debit which is brought into account in determining the company's profit or loss for that period in accordance with generally accepted accounting practice. So, in particular, it would still be subject to all of the normal rules which apply to determine the amounts to be brought into account under the loan relationship rules.

However, this rule does not apply to the extent that an amount is brought into account for tax as result of some other provision. This is to avoid amounts being brought into account more than once.

Example

A company has a £100m loan receivable due from a third party that it measures at fair value in its accounts. It prepares accounts to 31 December 2023, at which point the loan has a fair value of £110m.

In the year to 31 December 2024 the debtor become a connected company to the creditor company. As a result, the connected company rules apply for that period, and so the creditor company is required to recognise the loan at its amortised cost basis of account, which can be assumed to be £100m as at 1 January 2024.

As a result, under S316 the creditor company must bring into account a debit amount of £10m, representing the fall in the value of the loan asset, for the purposes of the loan relationship rules, from £110m to £100m.

Position where the company is no longer a party to the loan relationship

S318 applies the same approach where there is a change in accounting bases in a case where a company is not a party to a loan relationship, but 

amounts are nonetheless brought into account for tax through the application of S330A, see CFM33275.

The wording is different, referring to "the amount outstanding in respect of the loan relationship", to reflect the fact that the company is not actually a party to it in the company period of account in question.

Change of Accounting Practice Regs

As a result of the introduction of IFRS, there was the potential for companies to be subject to significant transitional adjustments at the point they changed accounting practice. As a result, the government introduced specific rules in 2004 to ensure that the correct amounts were brought into account on transition, and to spread certain transitional amounts over 10 years. These rules are explained at CFM76000.

Pre-2016

The operation of the S315-S319 for periods before 2016 is set out at CFM33166.