- all derivatives (including interest rate swaps, a forward commitment to purchase a commodity that is capable of being cash-settled, and options and forward contracts)
- loans that aren’t plain vanilla debt – where, for example, the amount repayable can vary or where non-standard interest rates are used
- investments in convertible debt where the return to the holder can vary with the price of the issuer’s equity shares rather than just with market interest rates [footnote 3]
IAS 39 option
- assets and liabilities held for trading purposes or speculatively
- assets and liabilities designated at the https://paydayloanstennessee.com/cities/charleston/ outset by the company as at fair value through profit and loss
- all derivative financial instruments
Tax treatment
A particular aspect of the taxation of loan relationships and derivative contracts is that it departs from the normal principle of looking only at the profit and loss account (or income statement). The legislation ensures that most items taken to ‘reserves’ are brought into account. This would include amounts recognised in the STRGL under Old UK GAAP and amounts recognised as items of OCI under FRS102 or IAS . A further rule ensures that where a profit or a loss from a loan relationship or derivative contract is recognised directly to equity, then this would be brought into account in the same way as if it was recognised to profit or loss or through reserves.
As a result, where the accounts measure the instrument at fair value, either with profits going to profit or loss, or as items of other comprehensive income, these fair value movements will typically be brought into account for tax. There are, however, certain exceptions where the tax statute specifies a particular accounting treatment. In this case, section 349 CTA 2009 requires the profits to be calculated for tax purposes on the basis of an amortised cost basis. Also, there are specific rules dealing with derivative contracts which form part of a hedging relationship (these are explained in more detail below).
Transitional adjustments
Further detail on specific transactions involving financial instruments where the requirements of FRS 102 differ from the requirements of Old UK GAAP are set out below.
4.3 Debt-equity swap
Where debt is extinguished through the issue of an entity’s own equity the accounting applied in accordance with Old UK GAAP may differ from that required by FRS 102.
FRS 102 doesn’t provide specific guidance on debt-equity swaps. Section 11 of FRS 102 [footnote 6] requires that any difference between the carrying amount of the financial liability extinguished and the consideration paid is recognised in profit or loss. In addition Section 22 requires that equity instruments are recognised on issue at the fair value of the cash or other resources received. However, companies will need to consider the specific facts and nature of the transaction undertaken. For example, company law considerations regarding realised profits and share premium accounts will need to be considered and may impact on the accounting treatment.
Tax treatment
Under general principles of the loan relationship regime, an amount of profit recognised to the profit and loss account, or to reserves, would be brought into account. However, section 322 CTA 2009 will typically exempt gains arising where a debt is released in consideration of ordinary shares. See CFM 33200 onwards for further details of this exemption.
4.4 Debt restructuring / derecognition
Debt may be restructured or have its terms modified such that, in accordance with FRS 5 and Old UK GAAP (where FRS 26 isn’t adopted), no gain or loss would be recognised in the accounts.