CFM33050 | Loan relationships: Core rules: other types of profits and losses

CTA09/S306A(1)(a)

Profits and losses on loan relationships and their related transactions

Profits or losses, other than interest, may arise either as a result of the terms of a loan relationship or from the way in which the company accounts for it, or they may arise from a related transaction.

Examples of profits or losses within the loan relationships rules are:

• changes in the fair value of a loan relationship that is accounted for on a fair value or mark to market basis

• an impairment loss or bad debt provision made by a creditor who accounts for debt on an accruals or amortised cost basis, or the reversal of such a provision

• the release of all or part of a debt, which will give rise to a profit for the debtor and a loss for the creditor

• a profit or loss realised on the sale or other disposal of a debt asset, or on the novation of a debt liability

• discounts or premiums that arise on a loan relationship, either on inception of the loan or from acquiring the loan after inception

Example

Brown Ltd owns a security with a nominal value of £40,000. The company paid £37,000 for it on inception of the loan, receives interest of £500 in year 1, then sells it to a securities trader for £36,000.

The following are items within the scope of the loan relationship rules:

• the interest income, being interest (S306(1)(b))

• the discount, being a profit from a loan relationship (S306(1)(a))

• the loss on sale, being a loss on a related transaction (S306(1)(a))

Further guidance

Related transaction

A 'related transaction' is essentially the disposal or acquisition of the loan relationship or a variation in its terms - see CFM31075