SolvedCFM35180 | Loan relationships: connected companies: example of change of accounting basis
From HM Revenue & Customs · Corporate Finance Manual
Change of accounting basis on becoming connected: example
H plc is the holding company of a trading group. It grants a franchise to a US company to trade under the ‘H’ name, and also holds interest-bearing loan notes issued by the US company. The notes, with a face value of $2 million, were issued at a discount. H plc accounts for the notes as an available for sale asset.
In year ended 31 December 2007, H plc acquires 90% of the shares in the US company, and therefore becomes connected.
The value of the loan notes at 31 December 2006 and 31 December 2007 is as follows:
| Date | Carrying value - amortised cost basis | Exchange rate (£/$) | Amortised cost basis - sterling equivalent | Fair value |
|---|---|---|---|---|
| 31 Dec 2006 | $1,900,000 | 1.7000 | £1,117,647 | £1,130,000 |
| 31 Dec 2007 | $1,950,000 | 1.7200 | £1,133,720 | £1,140,000 |
At 31 December 2006, the closing fair value is £1,130,000 - this is amount FVA under CTA09/S350. The opening value on an amortised cost basis (ACA) in the period during which the connection starts is £1,117,647. The difference between these, £12,353, is brought in as a loan relationships debit in the year ended 31 December 2007.
The tax computations for year ended 31 December 2007 will be on an amortised cost basis. They will show a credit of £16,073 (£1,133,720 - £1,117,647). The taxable amount, net of the S350 debit, is therefore £3,720 (plus interest credits).