Finance Bill

House of Commons

Session 2002 - 03
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Finance Bill

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 1 — Loan relationships
306

Derivative contracts for unallowable purposes
4     (1)
In paragraph 23, in sub-paragraph (7) (definition of amount of accumulated
credits against which accumulated net losses may be brought into account)
in paragraph (b) after “an amount equal to” insert “—
(i)
so much of any debits arising, in the case of
5
the derivative contract, for that accounting
period or any earlier accounting period as is
not, in accordance with sub-paragraph (3),
referable to the unallowable purpose, and
(ii)”.
10
      (2)
The amendment made by this paragraph has effect in relation to accounting
periods ending on or after 17th March 2004.
Open-ended investment companies: capital profits and losses
5     (1)
In paragraph 33(4)(b) (which refers to a subsequent statement of
recommended practice issued by Financial Services Authority) omit “issued
15
by the Financial Services Authority”.
      (2)
This amendment has effect in relation to accounting periods beginning on or
after 1st February 2004.
Schedule 10
Section 52

Amendment of enactments that operate by reference to accounting practice
20
Part 1
Loan relationships
Main computational provisions
1     (1)
Section 84 of the Finance Act 1996 (c. 8) (debits and credits to be brought into
account) is amended as follows.
25
      (2)
In subsection (1) omit “in accordance with an authorised accounting method
and”.
      (3)
Omit subsections (2) and (4A).
      (4)
For subsection (7) substitute—
“(7)
Schedule 9 to this Act contains further provisions as to the debits and
30
credits to be brought into account for the purposes of this Chapter.”.
2     (1)
Section 84A of that Act (exchange gains and losses from loan relationships)
is amended as follows.
      (2)
For subsection (3) substitute—
“(3)
Subsection (1) does not apply to an exchange gain or loss of a
35
company to the extent that it arises—
(a)
in relation to an asset or liability representing a loan
relationship of the company, or

Finance Bill
Schedule 10 — Amendment of enactments that operate by reference to accounting practice
Part 1 — Loan relationships
307

(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
308

(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
309

(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
310

      (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
311

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
312

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