CFM33167 -  Loan relationships: core rules: pre-2016 rules: GAAP: changes of accounting policy: ‘tainted’ HTM assets

This guidance applies to company period of account beginning before 1 January 2016

‘Tainted’ held to maturity assets

CFM21570 explains that if a company sells or reclassifies more than an insignificant proportion of its held to maturity assets, it must reclassify all of its remaining held to maturity assets as available for sale and so use fair value accounting. This ‘tainting’ lasts for the remainder of the accounting period and for the next two years. After that, any such assets that the company still holds can once again be classified as held to maturity.

Regulation 5 of the Loan Relationships and Derivative Contracts (Change of Accounting Practice) Regulations 2004 (SI 2004/3271) allowed a company to ignore the ‘tainting’ for tax purposes, and to continue computing loan relationships credits and debits on an amortised cost basis.

The regulation applied where in an accounting period

• a company disposed of less than 10% of its held to maturity assets, measured on an amortised cost basis (the reference to ‘greater than 10%’ in the original version of the regulations was an error); and
• as a result, the remaining held to maturity assets were reclassified as available for sale.

The effect of the regulation was to disregard for tax purposes both fair value changes in the assets that are taken to equity during the period that they were classified as available for sale, and accounting adjustments when the assets were reclassified from held to maturity to available for sale, or back again. But the company could elect, within 90 days of making the disposal, that the regulation did not apply, in which case CTA09/S308 applied in the normal way.

The application of this regulation was likely to be uncommon in practice, since only a minority of companies were likely to have held loan relationships that met the stringent conditions for held to maturity classification.