CFM33230 | Loan relationships: the matters and computational rules: amounts not brought into account: impairment where ‘Old UK GAAP’ was used

This guidance covers the position of Old UK GAAP - for companies that had not adopted IAS39, FRS26, FRS102 or FRS105. It is not applicable to periods of account beginning on or after 1 January 2016.

Impairment: companies using ‘old UK GAAP’

‘Impairment’ is defined in the loan relationships legislation only to the extent of making it clear that impairment includes uncollectability of a debt. It is not tied to the use of a particular accounting standard - a company that did not adopt IAS 39, FRS 26 or FRS102 in a period before 1 January 2016 can still have an impairment loss.

Nevertheless, the rules on impairment in IAS 39, FRS 26 or FRS102 should be used as a general guide to what ‘impairment’ means in the context of loan relationships. You should take a common sense view, tailored to the circumstances of the company.

A company using ‘Old UK GAAP’ (or the FRSSE) may compute a provision for bad and doubtful debts in a way that follows, or substantially follows, the procedures in FRS 26. Such a provision will be allowable for tax purposes.

On the other hand, many smaller companies will continue simply to assess outstanding debts on an individual basis, without attempting to also assess whether groups of debts are impaired. Where such provisions have been accepted as reasonable in the past, they should continue to be accepted as allowable impairment losses in periods beginning on or after 1 January 2005.

A provision will not be an allowable impairment loss unless it is based on objective evidence that, as a result of some event or events, future cash flows from the debt or debts will be reduced. There must be an actual event - not just a prediction that something will happen in the future - and it must be possible to make a reliable estimate of the reduction in value of the debt.

CTA09/S324 prevents a company from getting relief for a write-down of a debt that is not an impairment loss - see CFM33210.

Periods beginning on or before 1 January 2005

In periods of account beginning before 1 January 2005, the authorised accruals basis of accounting required the company to assume that every amount under a creditor loan relationship was payable in full, unless a departure from that assumption was specifically permitted. Departure from the assumption (‘bad debt relief’) was allowed only where a debt was bad or doubtful. CFM80200.

This rule does not apply to periods of account beginning on or after 1 January 2005. In some cases, this means that a company’s allowable impairment losses will exceed the relief that was claimed under the previous rules. This is because, under IAS 39 or FRS 26, recognition of impairment losses is not restricted to cases where the creditor feels a default is probable (or where it has already occurred). An impairment loss may be recognised where there is data indicating that the estimated future cash flows from a group of assets will decrease.