Finance (No. 2) Bill

House of Commons

Session 2004 - 05
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Finance (No. 2) Bill

Finance (No. 2) Bill
Schedule 4 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
112

      (4)
In subsection (3)—
(a)
in paragraph (a) after “subsection (1)” insert “or (2)”, and
(b)
in paragraph (b) for “subsection (1)” substitute “that subsection”.
      (5)
In subsection (4) after “subsection (1)” insert “or (2)”.
27    (1)
Section 94 of FA 1996 (loan relationships: treatment of indexed gilt-edged
5
securities) shall be deemed not to have been repealed by paragraph 12 of
Schedule 10 to FA 2004.

Paragraph 12(3) of Schedule 25 to FA 2002 (which amended that section)
shall also be deemed not to have been repealed by Division (6) of Part 2 of
Schedule 42 to FA 2004.
10
      (2)
That section is, instead, amended as follows.
      (3)
For subsections (1) to (3A) substitute—
“(1)
In the case of a loan relationship represented by an index-linked gilt-
edged security—
(a)
the amounts to be brought into account for the purposes of
15
this Chapter must be determined using fair value accounting,
and
(b)
the following adjustment shall be made in computing those
amounts.
(2)
The adjustment shall be made wherever—
20
(a)
those amounts fall to be determined by reference to the value
of the security at two different times, and
(b)
there is a change in the retail prices index between those
times.
(3)
The adjustment is made to the carrying value of the security at the
25
earlier time and is to increase or, as the case may be, reduce it by the
same percentage as the percentage increase or reduction in the retail
prices index between the earlier and the later time.”.
28    (1)
Section 94A of FA 1996 (loan relationships with embedded derivatives) is
amended as follows.
30
      (2)
In subsection (1) for “is permitted or required in accordance with generally
accepted accounting practice to treat” substitute “in accordance with
generally accepted accounting practice treats”.
      (3)
Where—
(a)
immediately before the end of its last period of account beginning
35
before 1st January 2005 a company holds one or more assets to which
section 92 or 93 of FA 1996 applies, and
(b)
section 94A of FA 1996 does not otherwise apply in relation to those
assets in the company’s first period of account beginning on or after
1st January 2005,
40

the company may elect that section 94A shall apply in relation to those
assets.
      (4)
Any such election—
(a)
must be made to the Inland Revenue in writing on or before 31st July
2005,
45

Finance (No. 2) Bill
Schedule 4 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
113

(b)
must apply to all the assets held by the company as mentioned in
sub-paragraph (3), and
(c)
is irrevocable.
29
In section 103 of FA 1996 (interpretation), after subsection (1A) (meaning of
“exchange gains or losses”) insert—
5
“(1AA)
In a case where fair value accounting is used the valuation referred
to in subsection (1A) is the valuation that would be given by an
amortised cost basis of accounting.”.
30
In Schedule 9 to FA 1996 (loan relationships: special computational
provisions), after paragraph 14 (debits and credits treated as relating to
10
capital expenditure) insert—
“Debits and credits recognised in equity or shareholders’ funds
14A
Where in accordance with generally accepted accounting practice
a debit or credit for a period in respect of a loan relationship of a
company—
15
(a)
is recognised in equity or shareholders’ funds, and
(b)
is not recognised in any of the statements mentioned in
section 85B(1),

the debit or credit shall be brought into account for that period for
the purposes of this Chapter in the same way as a debit or credit
20
that, in accordance with generally accepted accounting practice, is
brought into account in determining the company’s profit or loss
for that period.”.
31    (1)
Paragraph 19A of Schedule 9 to FA 1996 (loan relationships: adjustment on
change of accounting policy) is amended as follows.
25
      (2)
In sub-paragraph (4), after “means” insert “, subject to sub-paragraph (4B),”.
      (3)
After that sub-paragraph insert—
   “(4A)
For the purposes of this paragraph the “carrying value” of an asset
or liability includes amounts recognised for accounting purposes
in relation to the loan relationship in respect of—
30
(a)
accrued amounts;
(b)
amounts paid or received in advance;
(c)
impairment losses (including provisions for bad or
doubtful debts).
     (4B)
In determining the profits, gains and losses to be recognised in
35
determining the carrying value of the asset or liability for the
purposes of this paragraph, the following provisions—
(a)
section 87(2) (accounting method where parties have a
connection),
(b)
section 88A(4) (accounting method where rate of interest is
40
reset),
(c)
section 94 (loan relationships: treatment of indexed gilt-
edged securities),
(d)
section 94A(2) (loan relationships with embedded
derivatives),
45
(e)
section 96(2) (special rules for certain gilts);

Finance (No. 2) Bill
Schedule 4 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
114

(f)
section 154(6) (FOTRA securities: certain amounts not to be
brought into account), and
(g)
paragraphs 1, 1A, 2, 6, 12 and 18 of this Schedule (special
computational provisions),

apply as they apply for the purposes of determining the credits
5
and debits to be brought into account under this Chapter.
     (4C)
Where—
(a)
a company has ceased to be a party to a loan relationship,
(b)
section 103(6) (credits and debits to be brought into
account in respect of profits, gains and losses arising in the
10
cessation period) applied to the cessation, and
(c)
there is a difference between—
(i)
the amount outstanding in respect of the loan
relationship at the end of the earlier period, and
(ii)
the amount outstanding in respect of the loan
15
relationship at the beginning of the later period,

a debit or credit (as the case may be) corresponding to that
difference shall be brought into account for the purposes of this
Chapter at the beginning of the later period.
     (4D)
In sub-paragraph (4C), “the amount outstanding”, in respect of a
20
loan relationship, means so much of the amount recognised as
deferred income or deferred loss in the company’s balance sheet,
in accordance with generally accepted accounting practice, in
respect of the profits, gains or losses that arose from that
relationship or a related transaction in the cessation period (within
25
the meaning of section 103(6)) as has not been represented by
credits or debits brought into account under this Chapter.”.
      (4)
In sub-paragraph (5) after “sub-paragraph (3)” insert “or (4C)”.
      (5)
Omit sub-paragraph (6).
FA 1997
30
32
In Schedule 12 to FA 1997 (leasing arrangements: finance leases and loans),
in paragraph 30(1) (interpretation) omit the definitions of “consolidated
group accounts”, “group of companies” and “member” in relation to a group
of companies.
CAA 2001
35
33
In section 219 of CAA 2001 (finance leases), in subsection (3) (reference to
group accounts) for paragraph (b) substitute—
“(b)
are drawn up in accordance with generally accepted
accounting practice.”.
Schedule 26 to FA 2002
40
34    (1)
Paragraph 17B of Schedule 26 to FA 2002 (derivative contracts: amounts
recognised in determining company’s profit or loss) is amended as follows.
      (2)
In sub-paragraph (1)(a) after “profit and loss account” insert “or income
statement”.

Finance (No. 2) Bill
Schedule 4 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
115

      (3)
For sub-paragraph (2) substitute—
    “(2)
An amount that in accordance with generally accepted accounting
practice is shown as a prior period adjustment in any such
statement as is mentioned in sub-paragraph (1) shall be brought
into account for the purposes of this Schedule in computing the
5
company’s profits and losses for the period to which the statement
relates.

This does not apply to an amount recognised for accounting
purposes by way of correction of a fundamental error.”.
35
After paragraph 25 of Schedule 26 to FA 2002 (debits and credits treated as
10
relating to capital expenditure) insert—
“Debits and credits recognised in equity or shareholders’ funds
25A
Where in accordance with generally accepted accounting practice
a debit or credit for a period in respect of a derivative contract of a
company—
15
(a)
is recognised in equity or shareholders’ funds, and
(b)
is not recognised in any of the statements mentioned in
section 85B(1),

the debit or credit shall be brought into account for that period for
the purposes of this Chapter in the same way as a debit or credit
20
that, in accordance with generally accepted accounting practice, is
brought into account in determining the company’s profit or loss
for that period.”.
36
In paragraphs 38(1) and (3) and 38A(1) and (3) of Schedule 26 to FA 2002, as
inserted by Schedule 10 to FA 2004, for “creditor relationship” substitute
25
“derivative contract”.

These amendments shall be deemed always to have had effect.
37
In paragraph 54 of Schedule 26 to FA 2002 (derivative contracts: general
interpretation), after sub-paragraph (2) (meaning of “exchange gains or
losses”) insert—
30
   “(2A)
In a case where fair value accounting is used the valuation referred
to in sub-paragraph (2) is the valuation that would be given by an
amortised cost basis of accounting.”.
Schedule 29 to FA 2002
38    (1)
Paragraph 6 of Schedule 29 to FA 2002 (gains and losses of a company from
35
intangible fixed assets: reference to consolidated group accounts) is
amended as follows.
      (2)
Omit sub-paragraph (2).
      (3)
After that sub-paragraph insert—
   “(2A)
This paragraph does not apply if the consolidated group
40
accounts—
(a)
are drawn up using a different accounting framework
from that used for the company’s individual accounts, and
(b)
as a result, are prepared on a basis that, in relation to the
matters mentioned in sub-paragraph (1), substantially
45

Finance (No. 2) Bill
Schedule 4 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
116

diverges from the basis used in the company’s individual
accounts.”.
39
In paragraph 8(1) of Schedule 29 to FA 2002 for “a company’s profit and loss
account” substitute “determining a company’s profit or loss”.
40
In paragraphs 9(1), 12(1), 14(1), 16(1), 17(1), 26(1)(a), 103(2) and (3)(a) of
5
Schedule 29 to FA 2002, for “the company’s profit and loss account”
substitute “determining the company’s profit or loss”.
41
In paragraph 13(1)(a) of Schedule 29 to FA 2002 for “the profit and loss
account” substitute “determining the company’s profit or loss”.
42
In paragraphs 27 and 28 of Schedule 29 to FA 2002 (intangible fixed assets:
10
calculation of tax written down value), for sub-paragraph (3) substitute—
    “(3)
This paragraph has effect subject to—
paragraph 29 in the case of an asset that has been the subject
of a part realisation, and
Part 13A of this Schedule in the case of an asset that has been
15
subject to adjustment on a change of accounting policy.”.
43
In paragraph 29 of Schedule 29 to FA 2002 (intangible fixed assets: effect of
part realisation), after sub-paragraph (4) insert—
    “(5)
On a subsequent change of accounting policy affecting the asset,
the provisions of Part 13A of this Schedule apply.”.
20
44
In Part 7 of Schedule 29 to FA 2002 (intangible fixed assets: roll-over relief in
case of realisation and reinvestment), after paragraph 42 insert—
“References to cost of asset where asset affected by change of accounting policy
42A   (1)
In the case of an asset to which Part 13A of this Schedule has
applied (adjustment on change of accounting policy) the
25
references in this Part to the cost of the asset shall be read as
follows.
      (2)
Where paragraph 116B applied (change of accounting value) the
references are unaffected.
      (3)
Where paragraph 116C or 116D applied (changes involving
30
disaggregation of asset) the references to the cost of the asset shall
be read as references to the appropriate proportion of that cost.

The appropriate proportion is determined by applying to the cost
of the asset the same fraction as is applied by paragraph 116C(5)
or 116D(3), as the case may be, to determine the tax written down
35
value of the asset after the change.
      (4)
References in this paragraph to paragraphs 116B, 116C and 116D
include references to those provisions as applied by paragraph
116E.”.
45
For paragraph 116A of Schedule 29 to FA 2002 (intangible fixed assets:
40

Finance (No. 2) Bill
Schedule 4 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
117

adjustment on change of accounting policy) substitute—
“Part 13A
Adjustment on change of accounting policy
Introduction
116A  (1)
This Part of this Schedule applies where—
5
(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
(b)
the approach in each of those periods accords with the law
and practice applicable in relation to that period.
10
      (2)
It applies, in particular, where—
(a)
the company prepares accounts for the earlier period in
accordance with UK generally accepted accounting
practice and for the later period in accordance with
international accounting standards, or
15
(b)
the company prepares accounts for the earlier period in
accordance with international accounting standards and
for the later period in accordance with UK generally
accepted accounting practice.
Change of accounting policy involving change of value
20
116B  (1)
If as a result of the change of accounting policy there is a difference
between—
(a)
the accounting value of an intangible fixed asset of the
company at the end of the earlier period, and
(b)
the accounting value of that asset at the beginning of the
25
later period,

a corresponding debit or credit (as the case may be) shall be
brought into account for tax purposes in the later period.
      (2)
Any such debit or credit is treated as arising at the beginning of the
later period.
30
      (3)
The amount of the debit or credit to be brought into account for tax
purposes is:

where—
Accounting Difference is the amount of the difference
specified in sub-paragraph (1);
35
Tax Value is the tax written down value of the asset at the end
of the earlier period; and
Accounting Value is the accounting value of the asset at the
end of that period.
      (4)
The tax written down value of the asset at the beginning of the
40
later period shall be taken to be the tax written down value of the
asset at the end of the earlier period, reduced by the amount of the

Finance (No. 2) Bill
Schedule 4 — Accounting practice and related matters
Part 2 — Other provisions connected with accounting practice
118

debit or (as the case may be) increased by the amount of the credit
brought into account for tax purposes under sub-paragraph (3).
      (5)
Subsequently—
(a)
the cost recognised for tax purposes shall be taken to be the
tax written down value given by sub-paragraph (4),
5
together with the cost recognised for tax purposes of any
subsequent expenditure on the asset that is capitalised for
accounting purposes; and
(b)
the tax written down value shall be determined taking
account only of subsequent debits and credits.
10
      (6)
This paragraph does not apply to an asset in respect of which an
election has been made under paragraph 10 (election for writing
down at fixed-rate).
      (7)
This paragraph has effect subject to—
paragraph 116F (cap on credit to be brought into account on
15
change of accounting policy), and
paragraph 116G (debits or credits brought into account under
other provisions).
Change of accounting policy involving disaggregation
116C  (1)
This paragraph applies where the change of accounting policy
20
results in an intangible fixed asset of the company that was treated
as one asset (“the original asset”) in the earlier period being treated
as two or more assets (“the resulting assets”) in the later period.
      (2)
If there is a difference between—
(a)
the accounting value of the original asset at the end of the
25
earlier period, and
(b)
the aggregate accounting value of the resulting assets at
the beginning of the later period,

a corresponding debit or credit (as the case may be) shall be
brought into account for tax purposes in the later period.
30
      (3)
Any such debit or credit is treated as arising at the beginning of the
later period.
      (4)
The amount of the debit or credit to be brought into account for tax
purposes is:

where—
35
Accounting Difference is the amount of the difference
specified in sub-paragraph (2),
Old Tax Value is the tax written-down value of the original
asset at the end of the earlier period, and
Old Accounting Value is the accounting value of that asset at
40
the end of that period.
      (5)
The tax written down value of each resulting asset at the
beginning of the later period is given by: