CFM46460 | Deemed loan relationships: repos: tax rules: debtor and debtor quasi-repos: further examples: debtor quasi-repo

From HM Revenue & Customs · Corporate Finance Manual

Example: debtor quasi-repos

CFM46370 explains why both A and B have a debtor quasi-repo in this case.)

1 January 2009: A sells securities to C for 100.
30 April 2009: A novates its rights and obligations under the repo to B (also a borrower), for which it pays 102 to B. This represents the advance of 100 from C, plus a finance charge of 2 (4 months at 6% per annum). (The transaction will separately reflect the market value of the securities being transferred to B.)
30 June 2009: B purchases the same or similar securities from C for 103. This includes a further finance charge of 1 (2 months at 6% per annum).

Accounting entries, in accordance with GAAP (excluding profit/loss on disposal to B) in addition to the entries at CFM46370:

1 January 2009 to 30 April 2009 (repo ‘ interest’ accrual):

Dr P&L 2
Cr Financial Liability 2 (the financial liability which has increased to 102 is reduced to nil by the novation payment made on 30 April 2009)

Net Profit and Loss result:

A’s finance charge of 2 is treated as interest for loan relationships purposes (CFM46410).

Accounting entries, in accordance with GAAP (excluding acquisition cost of securities) in addition to the entries at CFM46370:

30 April 2009 to 30 June 2009 (repo ‘interest’ accrual):

Dr P&L 1
Cr Financial Liability 1 (the financial liability which has increased to 103 is reduced to nil by the payment of the purchase price on 30 June 2009

Net Profit and Loss result:

B’s finance charge of 1 is treated as interest for loan relationships purposes (CFM46410).

This transaction corresponds to the creditor repo referred to in the footnote to the example at CFM46300 (where C is a company).