CFM46370 - Deemed loan relationships: repos: tax rules: debtor quasi-repos: examples

Debtor quasi-repos: examples

  • 1 January 2009: A sells securities to C for 100.
  • 30 April 2009: A novates its rights and obligations under the repo to B (also a borrower), for which it pays 102 to B, agreed at the outset (this includes a finance charge of 2; see CFM46460). (The transaction will separately reflect the market value of the securities transferred to B.)
  • 30 June 2009: B purchases the same or similar securities from C for 103, agreed at the outset (this includes a finance charge of 1).

Treatment of A

Accounting entries, in accordance with GAAP

1 January 2009 ( receipt of advance):

  • Dr Cash 100
  • Cr Financial Liability 100

30 April 2009

  • Dr Financial Liability 102
  • Cr Cash 102

A does not have a debtor repo because it does not meet Conditions D and E of the debtor repo conditions (CFM46350): it is not entitled or obliged to buy the securities, and its financial liability is extinguished otherwise than by a purchase of the securities.

A has a debtor quasi-repo because all of the conditions in CFM46360 are met:

  • Condition A: A receives an advance of money from another person (C).
  • Condition B: in accordance with GAAP, A records a financial liability in respect of that advance.
  • Condition C: a person (A) sells securities.
  • Condition D: the arrangement entitles or obliges B (a person other than the borrower) to buy those or any other securities, and provides for B to receive money from A to enable B to make that purchase (an “other relevant provision”).
  • Condition E: in accordance with GAAP, B’s receipt of the money from A extinguishes A’s financial liability in respect of the advance.

Treatment of B

Accounting entried, in accordance with GAAP

30 April 2009 (receipt of adviance):

  • Dr Cash 102
  • Cr Finacial Liability 102

30 April 2009 (purchase of securities):

  • Dr Financial Liability 103
  • Cr Cash 103

B does not have a debtor repo because it does not meet Condition C of the debtor repo conditions (CFM46350): it does not sell any securities to the lender.

B has a debtor quasi-repo because all of the conditions in CFM46360 are met:

  • Condition A: B receives an advance from another person (A).
  • Condition B: in accordance with GAAP, B records a financial liability in respect of that advance.
  • Condition C: a person (A) sells securities.
  • Condition D: the arrangement entitles or obliges B subsequently to buy those or any other securities. (Note: B would still have a debtor quasi-repo and its tax treatment would be the same if, under the arrangement, B had been entitled or obliged to buy the securities from a person other than C. This is because Condition D does not specify the person from whom the securities are to be bought.)
  • Condition E: in accordance with GAAP, B’s subsequent buying of the securities extinguishes its financial liability in respect of the advance.

Further point to note

This transaction corresponds to the creditor repo referred to in the footnote to the example at CFM46230 (where C is a company).