188体育

Example 1

J Ltd is a 100% subsidiary of K plc; both companies prepare accounts to 31 December. The group as a whole adopts International Accounting Standards from 1 January 2005.

In year ended 31 December 2004, J Ltd lends 拢2m to an unconnected company for 3 years, at a fixed rate of interest. On 1 July 2005, J Ltd assigns the loan to K plc at its fair value of 拢2.1m. At 31 December 2005, the fair value of the asset has fallen to 拢1.95m.

J Ltd classifies the loan as 鈥榣oans and receivables鈥�, and accounts for it at amortised cost. On disposal of the loan, it brings in a credit of 拢100,000. K plc designates the loan as an asset accounted for at fair value through profit and loss.

The notional carrying value of the loan at 1 July 2005 is 拢2m. Thus for tax purposes, J Ltd is treated as disposing of the loan for 拢2m. There is neither profit nor loss on the disposal; the credit of 拢100,000 in J Ltd鈥檚 accounts is ignored. Interest credited in J Ltd鈥檚 accounts is brought into account in the normal way.

K plc, for accounting purposes, will initially recognise the asset at 拢2.1m, and will therefore debit 拢150,000 (拢2.1m - 拢1.95m) to the income statement for year ended 31 December 2005, to reflect the drop in fair value. For tax purposes, however, K plc is treated as acquiring the loan for 拢2m, so it will bring in a debit of only 拢50,000. In subsequent accounting periods, the tax will follow the accounts.

Example 2

Facts as in example 1, except that that J Ltd lends $2m. At 1 July 2005, the fair value of the loan is $2.1m, and at 31 December 2005 it is $1.95m. J Ltd and K plc account in sterling.

At 1 July 2005, $2m is worth (say) 拢1.6m when translated at the spot rate. This is the value that would appear in a balance sheet drawn up immediately before the transfer, and hence is the notional carrying value for the purposes of S338. J Ltd鈥檚 profit or loss on the disposal is therefore computed on the basis that the transfer was for 拢1.6m. Similarly, K plc鈥檚 debits or credits will be computed on an opening fair value of 拢1.6m.

Example 3

The facts are as in example 1, except that K plc also classifies the debt asset as 鈥榣oans and receivables鈥�, and accounts for it on an amortised cost basis.

The tax consequences of the transfer for J Ltd are as in example 1.

For accounting purposes, K plc has acquired the asset at a premium of 拢100,000. It must write off this premium over the remaining term of the loan - amortisation of the premium, along with interest receivable on the loan, will enter into the computation of the effective interest rate (CFM21640). For tax purposes, however, it is treated as having acquired the loan for 拢2m. Amortisation of the premium in the accounts of K plc is ignored. There is thus a mismatch between tax and accounts that extends over the remaining term of the loan: K plc will need to make a computational adjustment, both in year ended 31 December 2005 and in subsequent periods.

Example 4

The facts are in example 3, except on 1 July 2005, K plc enters into an interest rate swap, notional principal amount 拢2m and with the same maturity as the loan, under which it receives floating rate interest and pays a fixed rate. It designates the swap as the hedging instrument, and the loan as the hedged item, in a fair value hedge of interest rate risk.

K plc initially recognises the loan at 拢2.1m. It applies hedge accounting, so that the carrying value of the loan is adjusted for changes in fair value attributable to the interest rate risk being hedged. Thus its balance sheet value at any time represents a hybrid between amortised cost and fair value. Fair value changes are taken to the income statement (where they offset fair value changes in the hedging derivative).

Suppose that, at 31 December 2005, the carrying value of the loan in K plc鈥檚 balance sheet is 拢1.97m. The company has therefore debited 拢130,000 to the income statement. However, for tax purposes, the company is treated as acquiring the loan for 拢2m. The debit is therefore restricted to 拢30,000. There is no effect on subsequent accounting periods.