Finance Bill

House of Commons

Session 2003 - 04
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Finance Bill

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 2 — Derivative contracts
305

      (3)
Omit sub-paragraphs (4) to (7).
      (4)
In sub-paragraph (8) after “(3)” insert “or (3A)”.
      (5)
In sub-paragraph (10) at the end add “and power to make provision subject
to an election or to other prescribed conditions”.
Accounting methods
5
49
In the heading to Part 4 of that Schedule for “ACCOUNTING METHODS”
substitute “COMPUTATION OF AMOUNTS TO BE BROUGHT INTO
ACCOUNT”.
50
For paragraphs 17 to 20 of that Schedule (authorised accounting methods
and their application) substitute—
10
“Computation in accordance with generally accepted accounting practice
17A   (1)
Subject to the provisions of this Schedule, the amounts to be
brought into account by a company for any period for the
purposes of this Schedule are those that, in accordance with
generally accepted accounting practice, are recognised in
15
determining the company’s 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 Schedule apply as if correct accounts
had been drawn up, and
20
(b)
the amounts referred to in this Schedule 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
25
amounts derived from an earlier period of account for which the
company did not draw up correct accounts, the amounts referred
to in this Schedule 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.
30
      (4)
The provisions of sub-paragraphs (2) and (3) apply where the
company does not draw up accounts at all as well as where it
draws up accounts that are not correct.
Amounts recognised in determining company’s profit or loss
17B   (1)
Any reference in this Schedule to an amount being recognised in
35
determining a company’s profit or loss for a period is to an
amount 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
40
(c)
in any other statement of items brought into account in
computing the company’s profits and losses for that
period.
      (2)
Sub-paragraph (1) does not apply to an amount recognised for
accounting purposes by way of correction of a fundamental error.
45

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 2 — Derivative contracts
306

      (3)
The Treasury may by regulations—
(a)
make provision excluding from sub-paragraph (1)
amounts of a prescribed description, and
(b)
make provision for or in connection with bringing into
account in prescribed circumstances amounts in relation to
5
which sub-paragraph (1) does not have effect by virtue of
regulations under paragraph (a) above.
      (4)
The regulations may provide that sub-paragraph (1) does not
apply to prescribed amounts in a period of account to the extent
that they derive from or otherwise relate to amounts brought into
10
account in a prescribed manner in a previous period of account.
      (5)
The power to make regulations under this paragraph includes—
(a)
power to make different provision for different cases; and
(b)
power to make provision subject to an election or to other
prescribed conditions.
15
      (6)
The power to make regulations under this paragraph does not
apply to exchange gains or losses (but see paragraph 16(3A) and
(8) to (10)).”.
51
In paragraph 21 (basis of accounting for contracts falling within paragraph
6, 7 or 8), for sub-paragraph (2) substitute—
20
     “(2)
Where this paragraph applies the debits and credits to be brought
into account for the purposes of this Schedule as respects the
derivative contract must be determined on the basis of fair value
accounting.”.
Special provision for bad debt etc.
25
52
In the heading to Part 5 of that Schedule (special provision for bad debt etc.)
for “BAD DEBT ETC” substitute “RELEASE OF LIABILITY”.
53    (1)
Paragraph 22 of that Schedule (bad debts etc.) is amended as follows.
      (2)
For the heading substitute “Release of liability under derivative contract”.
      (3)
Omit sub-paragraphs (1) to (4).
30
      (4)
In sub-paragraph (5), omit paragraph (b) and the word “and” preceding it.
Special computational provisions
54
In paragraph 22A of that Schedule (deemed assignment of derivative
contracts on company ceasing to be resident in UK etc.), omit sub-paragraph
(5).
35
55
In paragraph 23 of that Schedule (derivative contracts for unallowable
purposes), in sub-paragraphs (2) and (3) omit “given by the authorised
accounting method used”.
56    (1)
Paragraph 25 of that Schedule (debits and credits treated as relating to
capital expenditure) is amended as follows.
40
      (2)
In sub-paragraph (1) omit “given by an authorised accounting method”.

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 2 — Derivative contracts
307

      (3)
After sub-paragraph (3) add—
“(4)
Where a debit is brought into account by a company in accordance
with sub-paragraph (1), no debit shall be brought into account in
respect of—
(a)
the writing down of so much of the value of the fixed
5
capital asset or project as is attributable to that debit, or
(b)
so much of any amortisation or depreciation as represents
a writing off of the interest component of the asset.”.
57
In paragraph 30 of that Schedule (transactions within groups: authorised
mark to market basis of accounting)—
10
(a)
in the heading for “authorised mark to market basis of accounting”
substitute “fair value accounting”;
(b)
in sub-paragraph (1) for “an authorised mark to market basis of
accounting” substitute “fair value accounting”.
58
In paragraph 31A of that Schedule (amounts imputed under Schedule 28AA
15
to the Taxes Act 1988), in sub-paragraph (2) omit “, notwithstanding the
provisions of any authorised accounting method,”.
Collective investment schemes
59    (1)
Paragraph 32 of that Schedule (authorised unit trusts: capital profits, gains
or losses) is amended as follows.
20
      (2)
In sub-paragraph (1) omit “notwithstanding paragraph 15”.
      (3)
After that sub-paragraph insert—
    “(1A)
For the purposes of this paragraph “capital profits, gains or
losses”—
(a)
in the case of an authorised unit trust that prepares
25
accounts in accordance with UK generally accepted
accounting practice, has the meaning given by sub-
paragraphs (2) to (4), and
(b)
in the case of an authorised unit trust that prepares
accounts in accordance with international accounting
30
standards, has the meaning given by order made by the
Treasury.”.
      (4)
In sub-paragraph (2) for the words “For the purposes of this paragraph”
substitute “In the cases mentioned in sub-paragraph (1A)(a)”.
60    (1)
Paragraph 33 of that Schedule (open-ended investment companies: capital
35
profits, gains or losses) is amended as follows.
      (2)
In sub-paragraph (1) omit “notwithstanding paragraph 15”.
      (3)
After that sub-paragraph insert—
    “(1A)
For the purposes of this paragraph “capital profits, gains or
losses”—
40
(a)
in the case of an open-ended investment company that
prepares accounts in accordance with UK generally
accepted accounting practice, has the meaning given by
sub-paragraphs (2) to (4), and
(b)
in the case of an open-ended investment company that
45
prepares accounts in accordance with international

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 2 — Derivative contracts
308

accounting standards, has the meaning given by order
made by the Treasury.”.
      (4)
In sub-paragraph (2) for the words “For the purposes of this paragraph”
substitute “In the cases mentioned in sub-paragraph (1A)(a)”.
61
In paragraph 34 of that Schedule (power to amend paragraphs 32 and 33), in
5
sub-paragraph (1) after “the definition of capital profits, gains or losses”
insert “in paragraph 32(2) to (4) or 33(2) to (4)”.
62
In paragraph 36 of that Schedule (contracts relating to holdings in unit
trusts, open-ended investment companies and offshore funds) for sub-
paragraph (2) substitute—
10
     “(2)
The Corporation Tax Acts have effect for that period (and any
succeeding period in which the relevant contract is a relevant
contract of the company) as if the relevant contract were a
derivative contract.
     (2A)
The debits and credits to be brought into account for the purposes
15
of this Schedule as respects the company’s relevant holdings must
be determined on the basis of fair value accounting.”.
63
For paragraph 38 of that Schedule (investment trusts and venture capital
trusts: capital reserves) substitute—
“Investment trusts: capital profits, gains or losses
20
38    (1)
Capital profits, gains or losses arising to an investment trust from
a creditor relationship must not be brought into account as credits
or debits for the purposes of this Schedule.
      (2)
For the purposes of this paragraph “capital profits, gains or
losses”—
25
(a)
in the case of an investment trust that prepares accounts in
accordance with UK generally accepted accounting
practice, has the meaning given by sub-paragraphs (3) and
(4), and
(b)
in the case of an investment trust that prepares accounts in
30
accordance with international accounting standards, has
the meaning given by order made by the Treasury.
      (3)
In the cases mentioned in sub-paragraph (2)(a) capital profits,
gains or losses arising from a creditor relationship in an
accounting period are profits, gains or losses that are carried to or
35
sustained by a capital reserve in accordance with the Statement of
Recommended Practice.
      (4)
For the purposes of this paragraph the Statement of
Recommended Practice is, for an accounting period for which it is
required or permitted to be used—
40
(a)
the Statement of Recommended Practice relating to
Investment Trust Companies, issued by the Association of
Investment Trust Companies in January 2003, as from time
to time modified, amended or revised, or
(b)
any subsequent Statement of Recommended Practice
45
relating to investment trusts, as from time to time
modified, amended or revised.

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 2 — Derivative contracts
309

Venture capital trusts: capital profits, gains or losses
38A   (1)
Capital profits, gains or losses arising to a venture capital trust
from a creditor relationship must not be brought into account as
credits or debits for the purposes of this Schedule.
      (2)
For the purposes of this paragraph “capital profits, gains or
5
losses”—
(a)
in the case of a venture capital trust that prepares accounts
in accordance with UK generally accepted accounting
practice, has the meaning given by sub-paragraphs (3) and
(4), and
10
(b)
in the case of a venture capital trust that prepares accounts
in accordance with international accounting standards,
has the meaning given by order made by the Treasury.
      (3)
In the cases mentioned in sub-paragraph (2)(a) capital profits,
gains or losses arising from a creditor relationship in an
15
accounting period are profits, gains or losses that—
(a)
are carried to or sustained by a capital reserve in
accordance with the Statement of Recommended Practice
as if the venture capital trust were an investment trust, or
(b)
would be so carried to or sustained by a capital reserve if
20
the venture capital trust were an investment trust and
were using the Statement of Recommended Practice.
      (4)
For the purposes of this paragraph the Statement of
Recommended Practice is, in relation to an accounting period for
which it is required or permitted to be used—
25
(a)
the Statement of Recommended Practice relating to
Investment Trust Companies, issued by the Association of
Investment Trust Companies in January 2003, as from time
to time modified, amended or revised, or
(b)
any subsequent Statement of Recommended Practice
30
relating to investment trusts, as from time to time
modified, amended or revised.”.
Miscellaneous
64
In paragraph 48 of that Schedule (election to treat contract as two assets), for
sub-paragraph (4) substitute—
35
     “(4)
The debits and credits to be brought into account for the purposes
of Chapter 2 of Part 4 of the Finance Act 1996 as respects a creditor
relationship arising under sub-paragraph (2)(a) must be
determined on the basis of fair value accounting.”.
65
In paragraph 49(4) of that Schedule (partnerships involving companies:
40
provisions for determining credits and debits for company partner), for
paragraph (c) substitute—
“(c)
to the extent that any exchange gains or losses arising from
the contract are recognised in the firm’s statement of
recognised gains and losses or statement of changes in
45
equity, the exchange gains or losses shall to that extent be
treated as if they had been recognised in the corresponding
statement of the company partner.”.

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 2 — Derivative contracts
310

66
For paragraph 50 of that Schedule (partnerships involving companies:
application of accounting methods) substitute—
“Partnerships involving companies: use of fair value accounting
50    (1)
Where the company partner uses fair value accounting in relation
to its interest in the firm, the debits and credits to be brought into
5
account under paragraph 49 by that company must be determined
on the basis of fair value accounting.
      (2)
In this paragraph “company partner” and “firm” have the same
meaning as in paragraph 49.”.
67
After that paragraph insert—
10
“Adjustment on company changing to international accounting standards
50A   (1)
This paragraph applies where a company—
(a)
prepares accounts for one period (“the earlier period”) in
accordance with UK generally accepted accounting
practice, and
15
(b)
prepares accounts for the next period (“the later period”) in
accordance with international accounting standards,

and the approach in each of those periods accords with the law
and practice applicable in relation to that period.
      (2)
If there is a difference between—
20
(a)
the accounting value of a derivative contract of the
company at the end of the earlier period, and
(b)
the accounting value of that contract at the beginning of
the later period,

a corresponding debit or credit (as the case may be) shall be
25
brought into account for the purposes of this Schedule in the later
period.
      (3)
In sub-paragraph (2) “accounting value” means the carrying value
of the contract recognised for accounting purposes.
      (4)
Where or to the extent that an adjustment is made under this
30
paragraph, no adjustment under Schedule 22 (computation of
profits: adjustment on change of basis) shall be made.”.
Interpretation
68
Omit paragraph 52 of that Schedule (meaning of “statutory accounts”).
69
In paragraph 54(1) of that Schedule (interpretation)—
35
(a)
omit the definition of “authorised accounting method”, “authorised
accruals basis of accounting” and “authorised mark to market basis
of accounting”;
(b)
for the definition of “fair value” substitute—

““fair value”, in relation to a derivative contract of a company,
40
means the amount which, at the time as at which the value
falls to be determined, is the amount that the company
would obtain from or, as the case may be, would have to
pay to an independent person for—

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 3 — Intangible fixed assets
311

(a)
the transfer of all the company’s rights under the
contract in respect of amounts which at that time
are not yet due and payable, and
(b)
the release of all the company’s liabilities under the
contract in respect of amounts which at that time
5
are not yet due and payable;

“fair value accounting” means a basis of accounting under
which assets and liabilities are shown in the company’s
balance sheet at their fair value;”; and
(c)
omit the definition of “statutory accounts”.
10
Consequential amendment
70
In section 440 of the Taxes Act 1988 (insurance companies: transfers of assets
etc.), in subsection (2B) (treatment of derivative contract), for the words from
“any authorised accounting method” to “shall be applied” substitute
“Schedule 26 to the Finance Act 2002 applies”.
15
Part 3
Intangible fixed assets
Excluded assets: assets in respect of which capital allowances previously made
71
In Part 10 of Schedule 29 to the Finance Act 2002 (c. 23) (excluded assets),
after paragraph 73 (rights over tangible assets) insert—
20
“Assets entirely excluded: assets in respect of which capital allowance previously
made
73A   (1)
This Schedule does not apply to an intangible asset of a company
in the following circumstances.
      (2)
The circumstances are that—
25
(a)
the asset falls to be treated as an intangible asset in
accounts of the company,
(b)
in a previous period of account the asset fell to be treated
as a tangible asset in accounts of the company, and
(c)
an allowance under Part 2 of the Capital Allowances Act
30
(plant and machinery allowances) was made to the
company in respect of the asset on the latter basis.”.
Adjustment on change of accounting policy
72
In Part 13 of that Schedule (supplementary provisions), after paragraph 116
insert—
35
“Adjustment on change of accounting policy
116A  (1)
This paragraph applies where—
(a)
there is a change of accounting policy in drawing up a
company’s accounts from one period of account (the
“earlier period”) to the next (the “later period”), and
40