CFM46250 - Deemed loan relationships: repos: tax rules: creditor quasi-repos: examples
Examples: creditor quasi-repos
- 1 January 2009: A sells securities to C for 100.
- 30 April 2009: C novates its rights and obligations under the repo to D (also a lender), for which it receives 102 from D, agreed at the outset (this includes a finance return of 2);
- 30 June 2009: D sells the same or similar securities to A for 103, agreed at the outset (this includes a finance return of 1).
Treatment of C
| Accounting entries, in accordance with GAAP | - |
|---|---|
| 1 January 2009 (making of advance): | Dr Financial Asset 100; Cr Cash 100 |
| 30 April 2009 (novation receipt from D): | Dr Cash 102; Cr Financial Asset 102 |
C does not have a creditor repo because it does not meet Conditions D and E of the creditor repo conditions (CFM46230): it is not entitled or obliged to sell the same or similar securities, and its financial asset is extinguished otherwise than by a sale of the securities.
C has a creditor quasi-repo because all of the conditions in CTA09/S544 are met:
- Condition A: another person (A) receives an advance from C.
- Condition B: in accordance with GAAP, C records a financial asset in respect of that advance.
- Condition C: a person (A) sells securities.
- Condition D: the arrangement entitles or obliges another person (D) to sell those securities, and makes “other relevant provision”: under it, A’s liability to C is discharged by D’s subsequent sale of the securities.
- Condition E: in accordance with GAAP, the discharging of the liability extinguishes C’s financial asset in respect of the advance to A.
Treatment of D
| Accounting entries, in accordance with GAAP | - |
|---|---|
| 30 April 2009 (making of advance): | Dr Financial Asset 102; Cr Cash 102 |
| 30 June 2009 (sale of securities): | Dr Cash 103; Cr Financial Asset 103 |
D does not have a creditor repo because Conditions A, B and C of the creditor repo conditions (CFM46230) are not met: the borrower (A) does not receive an advance from D, D’s accounts do not record a financial asset in respect of such an advance, and A does not sell any securities to D.
D has a creditor quasi-repo because all of the conditions in CTA09/S544 are met:
- Condition A: another person (C) receives an advance from D.
- Condition B: in accordance with GAAP, D records a financial asset in respect of that advance.
- Condition C: a person (A) sells securities to any person (C).
- Condition D: the arrangement entitles or obliges the lender (D) subsequently to sell those or any other securities.
- Condition E: in accordance with GAAP, D’s subsequent selling of those securities extinguishes its financial asset in respect of the advance made to C.
Further point to note
This transaction corresponds to the debtor repo referred to in the footnote to the example at CFM46350 (where A is a company).