CFM33220 - Loan relationships: the matters and computational rules: credits and debits: amounts not brought into account: impairment losses

Accounting treatment

IAS39 / FRS102 / FRS105

IAS39, FRS102 and [FRS105] (and formerly FRS 26) require companies to assess their financial assets at each balance sheet date to see whether there is objective evidence that a financial asset, or group of assets, is impaired. Where loans or trade debts are concerned, this is a similar - but not identical - process to making a provision for bad or doubtful debts at the year end.

The standards lay down precise rules for identifying and measuring impairment losses. There is more detail on the process under IAS39 is at CFM21670. Except for assets accounted for at fair value through profit and loss (where any impairment will be swept up into the overall fair value change), impairment losses are recognised in the income statement, as is any credit resulting from reversal of an impairment loss.

IFRS 9

IFRS9 takes a different approach to impairment losses (also referred to as credit losses). The new standard will change the accounting for bad debts on financial assets (including trade debtors) from an “incurred loss” basis to “expected loss” basis. This will accelerate the recognition of impairment losses.

This will require:

• Recognition of a 12 month expected loss figure for all qualifying financial assets upon initial recognition;
• Recognition of lifetime expected losses for all qualifying financial assets when there has been a significant increase in credit risk since initial recognition, and the asset has fallen below investment grade (either where credit risk is assessed on a collective basis for a group of assets, or individually identifiable).

A simplified approach to recognise lifetime expected losses on all normal trade debtors is available, but not mandated, for certain contract debtors, trade debtors and leasing balances.

Note that companies that adopt FRS102 have the option of applying the recognition and measurement requirements of IFRS9.

Tax treatment

Creditor loan relationships

If the company correctly applies the relevant standard to arrive at a debit amount recognised in profit or loss for impairment losses (or a credit amount for reversal of impairment losses), the debit will be allowable (or the credit taxable) in accordance with the normal computational provisions. This will be the case whether the company applies an ‘incurred loss’ model under IAS39 / FRS102 / FRS105 or an ‘expected loss’ model under IFRS9.

The main exception to following the accounting treatment on impairment is where the debt is between connected companies (CFM35000+).

Trade debts and other non-lending relationships

The position for relevant non-lending relationships, such as trade debts is effectively the same as for creditor loan relationships. Where an impairment loss arises, this brings the debt within scope and the impairment loss or reversal is taxed as if it were a loan relationships matter - S479(2)(c), S481(3)(d) - see CFM41000+.

Again, no relief is normally available where the debt is between connected companies (CFM35000+).

Examples

Example: IAS39

A bank has statistical evidence, based on data, gathered over a number of years, that a rise in mortgage rates correlates with an increase in credit card default by customers with a poor credit history. In 2007, mortgage rates increase, and the bank recognises an impairment loss - calculated in accordance with the statistical data - on its portfolio of credit card debts owed by this customer group. The impairment loss - provided it is correctly calculated - accords with IAS 39, even though it cannot be identified with individual amounts owed by individual customers, and it will be allowable for tax purposes.