CFM80250 - Old rules: loan relationships: authorised accounting methods: authorised mark to market
Features of authorised mark to market
This guidance applies to periods of account beginning before 1 January 2005
An authorised MTM basis will
- bring in each loan relationship in each accounting period at fair value (FA96/S85 (1)(b))
- allocate payments to the period in which they become due and payable (FA96/S85(4)).
Example
A company with an accounting year end of 31 December subscribes for a security on 1 May for £200,000. The security has a face value of £200,000 and pays 6% fixed rate interest, due twice yearly on 1 March and 1 September.
Asset account
On 31 December 2002, 4 months worth of interest has accrued but has not been paid (the next payment of £6,000 is not due and payable until 1 March 2003). During the year, market interest rates fall and the security increases in value. The value of the security on 31 December 2002 is £205,000, reflecting the accrued interest of £4,000 and the rise in market value of, say, £1,000. There is a credit of £5,000 to the profit and loss account; the difference between the acquisition cost and the closing value.
Interest account
Interest shown in the accounts is the £6,000 due and payable on 1 September 2002.
‘Dirty’ and ‘clean’ mark to market
Where the fair value reflects amounts that have accrued up to the date of the valuation, but are not yet due and payable, it is known as the ‘dirty’ mark to market basis. This is shown in the example above. The ‘clean’ mark to market basis values the debt net of any accrued interest, showing interest accrued separately. Although not an authorised basis, it equates to an authorised basis (see CFM80300) and is also acceptable. This is the basis used by insurance companies and banks under UK GAAP.