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Finance Bill


Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 1 — Loan relationships

291

 

(b)   

as a result of the translation from one currency to another of

the profit or loss of part of the company’s business,

   

and is recognised in the company’s statement of recognised gains

and losses or statement of changes in equity.

(3A)   

Subsection (1) does not apply to so much of an exchange gain or loss

5

arising to a company in relation to an asset or liability representing a

loan relationship of the company as falls within a description

prescribed for the purpose in regulations made by the Treasury.”.

      (3)  

Omit subsections (4) to (7).

      (4)  

In subsection (8) after “(3)” insert “or (3A)”.

10

      (5)  

In subsection (10) at the end add “and power to make provision subject to an

election or to other prescribed conditions”.

3          

For sections 85 and 86 of that Act (authorised accounting methods and their

application) substitute—

“85A   Computation in accordance with generally accepted accounting

15

practice

(1)   

Subject to the provisions of this Chapter, the amounts to be brought

into account by a company for any period for the purposes of this

Chapter are those that, in accordance with generally accepted

accounting practice, are recognised in determining the company’s

20

profit or loss for the period.

(2)   

If a company does not draw up accounts in accordance with

generally accepted accounting practice (“correct accounts”)—

(a)   

the provisions of this Chapter apply as if correct accounts had

been drawn up, and

25

(b)   

the amounts referred to in this Chapter as being recognised

for accounting purposes are those that would have been

recognised if correct accounts had been drawn up.

(3)   

If a company draws up accounts that rely to any extent on amounts

derived from an earlier period of account for which the company did

30

not draw up correct accounts, the amounts referred to in this Chapter

as being recognised for accounting purposes in the later period are

those that would have been recognised if correct accounts had been

drawn up for the earlier period.

(4)   

The provisions of subsections (2) and (3) apply where the company

35

does not draw up accounts at all as well as where it draws up

accounts that are not correct.

85B   Amounts recognised in determining company’s profit or loss

(1)   

Any reference in this Chapter to an amount being recognised in

determining a company’s profit or loss for a period is to an amount

40

being recognised for accounting purposes—

(a)   

in the company’s profit and loss account,

(b)   

in the company’s statement of recognised gains and losses or

statement of changes in equity, or

(c)   

in any other statement of items brought into account in

45

computing the company’s profits and losses for that period.

 

 

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 1 — Loan relationships

292

 

(2)   

Subsection (1) does not apply to an amount recognised for

accounting purposes by way of correction of a fundamental error.

(3)   

The Treasury may by regulations—

(a)   

make provision excluding from subsection (1) amounts of a

prescribed description, and

5

(b)   

make provision for or in connection with bringing into

account in prescribed circumstances amounts in relation to

which subsection (1) does not have effect by virtue of

regulations under paragraph (a) above.

(4)   

The regulations may provide that subsection (1) does not apply to

10

prescribed amounts in a period of account to the extent that they

derive from or otherwise relate to amounts brought into account in a

prescribed manner in a previous period of account.

(5)   

The power to make regulations under this section includes—

(a)   

power to make different provision for different cases; and

15

(b)   

power to make provision subject to an election or to other

prescribed conditions.

(6)   

The power to make regulations under this section does not apply to

exchange gains or losses (but see section 84A(3A) and (8) to (10)).”.

4          

In section 87 of that Act (accounting method where parties have a

20

connection), for subsection (2) substitute—

“(2)   

Where this section applies the debits and credits to be brought into

account for the purposes of this Chapter as respects the loan

relationship must be determined on an amortised cost basis of

accounting.

25

(2A)   

The provisions of subsections (2B) and (2C) apply where subsection

(2) applies, or ceases to apply, with the result that there is a change

of basis of accounting for a loan relationship as between one

accounting period of a company and the next.

(2B)   

Where for an accounting period (“the relevant period”) a company

30

brings into account debits or credits determined in accordance with

an amortised cost basis of accounting, having used a fair value basis

of accounting for the immediately previous accounting period (“the

previous period”)—

(a)   

any amount by which the fair value of the relevant asset or

35

liability at the end of the previous period (“A”) exceeds the

cost of the asset or liability that would be given at that time

on an amortised cost basis of accounting (“B”) shall be

brought into account for the purposes of this Chapter as a

debit for the relevant period, and

40

(b)   

any amount by which B exceeds A shall be brought into

account for the purposes of this Chapter as a credit for that

period.

(2C)   

Where for an accounting period (“the relevant period”) a company

brings into account debits or credits determined on the basis of fair

45

value accounting, having used an amortised cost basis of accounting

for the immediately previous accounting period (“the previous

period”)—

 

 

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 1 — Loan relationships

293

 

(a)   

any amount by which the fair value of the relevant asset or

liability immediately before the relevant period (“C”) exceeds

the cost of the asset or liability that would be given at that

time on an amortised cost basis of accounting (“D”) shall be

brought into account for the purposes of this Chapter as a

5

credit for the relevant period, and

(b)   

any amount by which D exceeds C shall be brought into

account for the purposes of this Chapter as a debit for that

period.”.

5          

In section 88 of that Act (exemption from section 87 in certain cases), omit

10

subsection (2)(b) and subsection (3)(b).

6     (1)  

Section 88A of that Act (accounting method where rate of interest is reset) is

amended as follows.

      (2)  

In subsection (4) for the words from “the only accounting method

authorised” to the end substitute “the debits and credits to be brought into

15

account for the purposes of this Chapter as respects the loan relationship

must be determined on the basis of fair value accounting”.

      (3)  

Omit subsection (5).

7          

Omit section 90 of that Act (changes of accounting method).

8          

After that section insert—

20

“90A   Change of accounting basis applicable to assets or liabilities

(1)   

The Treasury may by regulations provide that where in accordance

with generally accepted accounting practice assets or liabilities of a

company that were previously dealt with for accounting purposes

on an amortised cost basis of accounting are required to be dealt with

25

for accounting purposes on the basis of fair value accounting, the

debits or credits to be brought into account for the purposes of this

Chapter shall continue be determined on an amortised cost basis of

accounting.

(2)   

The power to make regulations under this section includes power—

30

(a)   

to make different provision for different cases;

(b)   

to make such consequential, supplementary, incidental or

transitional provision, or savings, as appear to the Treasury

to be necessary or expedient; and

(c)   

to make provision subject to an election or to other prescribed

35

conditions.”.

9     (1)  

Omit section 92 of that Act (convertible securities etc.: creditor

relationships).

      (2)  

Where at the relevant time a company holds an asset to which section 92

applies—

40

(a)   

section 92(7) (deemed disposal and re-acquisition) shall have effect

as if the asset had ceased at that time to be an asset to which that

section applied (but without ceasing to represent a creditor

relationship of the company), and

(b)   

any amount falling to be brought into account under the Taxation of

45

Chargeable Gains Act 1992 (c. 12) shall be brought into account in

accordance with section 92(4) accordingly.

 

 

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 1 — Loan relationships

294

 

      (3)  

The relevant time for this purpose is immediately before the end of the last

period of account before that in relation to which sub-paragraph (1) has

effect (see section 52(3) of this Act).

10         

For section 92A of that Act (convertible securities etc.: debtor relationships)

substitute—

5

“92A   Debtor relationships involving options over securities

(1)   

This section applies to a liability representing a debtor relationship

of a company (“the debtor company”) if the rights attached to the

asset that represent the corresponding creditor relationship include

provision by virtue of which a person is or may become—

10

(a)   

entitled to acquire (whether by conversion or exchange or

otherwise), or

(b)   

obliged to acquire,

   

any shares (whether in the debtor company or another company).

(2)   

The amounts that may be brought into account for the purposes of

15

this Chapter in respect of a debtor relationship represented by a

liability to which this section applies are confined to—

(a)   

amounts relating to interest,

(b)   

amounts relating to exchange gains or losses, and

(c)   

amounts in respect of a release of any liability under the

20

relationship.

(3)   

Subsection (2) does not apply to amounts payable by the debtor

company in respect of the debtor relationship in a case where—

(a)   

the debtor company is carrying on a banking business or a

business as a securities house, and

25

(b)   

it entered into the debtor relationship in the ordinary course

of that business.

(4)   

In subsection (3)(a) “securities house” means a person—

(a)   

who is authorised for the purposes of the Financial Services

and Markets Act 2000, and

30

(b)   

whose business consists wholly or mainly of dealing as a

principal in financial instruments within the meaning of

section 349(5) and (6) of the Taxes Act 1988.”.

11    (1)  

Omit sections 93, 93A and 93B of that Act (relationships linked to the value

of chargeable assets).

35

      (2)  

Where at the relevant time a company holds an asset to which section 93

applies—

(a)   

section 93B (deemed disposal and re-acquisition) shall have effect as

if the asset had ceased at that time to be an asset to which section 93

applied (but without ceasing to represent a creditor relationship of

40

the company), and

(b)   

any amount falling to be brought into account under the Taxation of

Chargeable Gains Act 1992 (c. 12) shall be brought into account in

accordance with section 93(4) accordingly.

      (3)  

The relevant time for this purpose is immediately before the end of the last

45

period of account before that in relation to which sub-paragraph (1) has

effect (see section 52(3) of this Act).

 

 

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 1 — Loan relationships

295

 

12         

Omit section 94 of that Act (indexed gilt-edged securities).

13         

After that section insert—

“94A   Loan relationships with embedded derivatives

(1)   

This section applies where a company is permitted or required in

accordance with generally accepted accounting practice to treat the

5

rights and liabilities under a loan relationship to which it is party

(whether as debtor or creditor) as divided between—

(a)   

rights and liabilities under a loan relationship (the “host

contract”), and

(b)   

rights and liabilities under one or more derivative financial

10

instruments (“embedded derivatives”).

(2)   

The company shall be treated—

(a)   

for the purposes of this Chapter as party to a loan

relationship whose rights and liabilities consist only of the

rights and liabilities of the host contract, and

15

(b)   

for the purposes of Schedule 26 to the Finance Act 2002

(derivative contracts) as—

(i)   

party to a relevant contract within the meaning of that

Schedule whose rights and liabilities consist only of

those of the embedded derivative, or

20

(ii)   

if there is more than one embedded derivative, party

to relevant contracts within the meaning of that

Schedule each of whose rights and liabilities consist

only of those of one of the embedded derivatives.

(3)   

Each relevant contract to which the company is treated as party

25

under subsection (2)(b) shall be treated for the purposes of that

Schedule as an option, a future or a contract for differences according

to whether the rights and liabilities of the embedded derivative

would be of that character if contained in a separate contract.”.

14         

In section 95 of that Act (gilt strips), in subsection (1) for the words from “has

30

effect” to “accruals basis of accounting” substitute “applies”.

15         

In section 96 of that Act (special rules for certain other gilts), omit subsection

(3).

16         

In section 101 of that Act (financial instruments), after subsection (1) insert—

“(1A)   

This section does not apply where section 94A above applies

35

(treatment of embedded derivatives).”.

17    (1)  

Section 103 of that Act (interpretation) is amended as follows.

      (2)  

In subsection (1)—

(a)   

omit the definition of “authorised accounting method”, “authorised

accruals basis of accounting” and “authorised mark to market basis

40

of accounting”;

(b)   

at the appropriate places insert—

   

““amortised cost basis of accounting”, in relation to a loan

relationship of a company, means a basis of accounting

under which an asset or liability representing the loan

45

relationship is shown in the company’s accounts at cost

 

 

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 1 — Loan relationships

296

 

adjusted for cumulative amortisation and any impairment,

repayment or release;”;

   

““fair value”, in relation to a loan relationship of a company,

means the amount which, at the time as at which the value

falls to be determined, is the amount that the company

5

would obtain from or, as the case may be, would have to

pay to an independent person for—

(a)   

the transfer of all the company’s rights under the

relationship in respect of amounts which at that

time are not yet due and payable, and

10

(b)   

the release of all the company’s liabilities under the

relationship in respect of amounts which at that

time are not yet due and payable;”;

   

““fair value accounting” means a basis of accounting under

which assets or liabilities are shown in the company’s

15

balance sheet at their fair value;”;

   

““impairment” includes uncollectability;”; and

   

““impairment loss” means a debit in respect of the impairment

of a financial asset;”;

(c)   

omit the definition of “statutory accounts”.

20

      (3)  

Omit subsection (5).

Special computational provisions

18         

Schedule 9 to the Finance Act 1996 (c. 8) (loan relationships: special

computational provisions) is amended as follows.

19         

In paragraph 3(1) (options etc.) for “an authorised accruals basis of

25

accounting” substitute “an amortised cost basis of accounting”.

20    (1)  

Paragraph 5 (bad debts etc.) is amended as follows.

      (2)  

For the heading substitute “Release of liability under debtor relationship”.

      (3)  

Omit sub-paragraphs (1) to (2A).

      (4)  

In sub-paragraph (3)(b) for “an authorised accruals basis of accounting”

30

substitute “an amortised cost basis of accounting”.

      (5)  

In sub-paragraphs (5), (6)(b) and (c) and (7)(a) for “requires the use of an

authorised accruals basis of accounting” substitute “applies”.

21    (1)  

Paragraph 5A (bad debts and consortium relief) is amended as follows.

      (2)  

In the heading for “Bad debts” substitute “Impairment losses”.

35

      (3)  

In sub-paragraph (2) for “by virtue of paragraph 5 above a debit” substitute

“an impairment loss”.

      (4)  

In sub-paragraphs (5)(a) and (8)(b) for “debits brought into account for that

period by virtue of paragraph 5 above” substitute “impairment losses

brought into account for that period”.

40

      (5)  

In sub-paragraph (9) omit “by virtue of paragraph 5(2) above”.

      (6)  

In sub-paragraph (14), in the closing words, for “sub-paragraph (12)”

substitute “sub-paragraph (6)”.

      (7)  

For sub-paragraph (15)(a) substitute—

“(a)   

the debtor consortium company has, in accordance with an

45

amortised cost basis of accounting, brought into account

 

 

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 1 — Loan relationships

297

 

for an accounting period an amount in respect of a release

of any liability under a debtor relationship, and”.

      (8)  

In the closing words of sub-paragraph (15) omit “under paragraph 5(1)”.

      (9)  

In sub-paragraph (19), in the definition of “related debt recovery credit” for

“by virtue of paragraph 5(2) above in connection with a bad debt” substitute

5

“in connection with a debt”.

22    (1)  

Paragraph 6 (bad debts etc where parties have a connection) is amended as

follows.

      (2)  

In the heading for “Bad debt etc” substitute “Impairment losses”.

      (3)  

In sub-paragraph (1) for “requires an authorised accruals basis of accounting

10

to be used” substitute “(accounting method where parties have a

connection) applies”.

      (4)  

In sub-paragraph (2) omit “in accordance with that accounting method”.

      (5)  

For sub-paragraph (3) substitute—

     “(3)  

An impairment loss may be brought into account for the purposes

15

of this Chapter only in accordance with—

(a)   

sub-paragraph (4) below,

(b)   

paragraph 6A, or

(c)   

paragraph 6B.”.

      (6)  

After that sub-paragraph insert—

20

    “(3A)  

Where an impairment loss is excluded by sub-paragraph (3), no

credit in respect of any reversal of the impairment shall be brought

into account for the purposes of this Chapter.”.

      (7)  

In sub-paragraph (4) for “A departure from that assumption shall be

allowed” substitute “An impairment loss is not excluded by sub-paragraph

25

(3)”.

23    (1)  

Paragraph 6A (bad debts etc.: parties having connection and creditor in

insolvent liquidation etc.) is amended as follows.

      (2)  

In the heading for “Bad debt etc” substitute “Impairment losses”.

      (3)  

In sub-paragraph (2) for the words from “a departure” to “shall be allowed”

30

substitute “an impairment loss is not excluded by paragraph 6(3)”.

24    (1)  

Paragraph 6B (bad debts etc.: companies becoming connected) is amended

as follows.

      (2)  

In the heading for “Bad debt etc” substitute “Impairment losses”.

      (3)  

In sub-paragraph (1) for the words following paragraph (b) substitute “an

35

impairment loss is not excluded by paragraph 6(3) in the following two

cases”.

      (4)  

In sub-paragraph (2)—

(a)   

for the opening words down to “if—” substitute “The first case is

where—”;

40

(b)   

in paragraph (a) for “a departure has been allowed under paragraph

5(1) above” substitute “an impairment loss has been brought into

account for the purposes of this Chapter”.

      (5)  

In sub-paragraph (3) for “A departure shall be allowed” substitute “An

impairment loss may be brought into account”.

45

 

 

 
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