CFM33198 | Loan relationships: core rules: amounts not brought into account: debt releases: corporate rescue exemption: modification or replacement: example

This guidance is applicable to certain events that take place on or after 1 January 2015.

CTA09/323A

Company A is the borrower under a loan of £100,000 which is due for repayment in 18 months’ time. It is experiencing financial difficulty and agrees with its third party lender to extend the repayment date of the loan for a further 5 years and to make certain other amendments to the loan (the principal of which remains at £100,000). At the time of the ‘amend and extend’, in addition to being in negotiation with its third party lender, Company A has financial reports showing material cash flow shortfalls such that it is likely that Company A would be unable to repay the loan in 18 months’ time. The ‘amend and extend’ amounts to a substantial modification and so Company A derecognises the £100,000 liability under the ‘old’ loan in its accounts and recognises the ‘new’ loan at its fair value which, due to the amendments to the loan and the creditworthiness of the Company A, is £75,000. Company A recognises a credit of £25,000 in its profit and loss in the accounting period in which the ‘amend and extend’ takes place.

It then recognises debits of a total of £25,000 over the life of the loan as the loan is written back up to its face value.

Immediately before the debt modification, it is reasonable to assume that, without the modification and any related arrangements, there would be a material risk that, at sometime within the next 12 months, it could be demonstrated that Company A would be unable to repay the £100,000 loan on its scheduled maturity date. The exemption in CTA09/S323A therefore applies such that neither the £25,000 credit nor the £25,000 debits are brought into account for tax purposes.