CFM72350 | Other tax rules on corporate finance: securitisation: periods beginning on or after 1 January 2007: the regulations: interpretation: ‘financial assets’

What are ‘financial assets’?

CFM72380 to CFM72470 explain the definitions of the five types of ‘securitisation company’. The regulations require the ‘note-issuing company’, the ‘asset-holding company’ and the ‘warehouse company’, where they hold assets, to hold ‘financial assets’. In Regulation 2 (prior to the 2007 amendment regulations - see below and the 2018 amendment regulations which inserted a new definition of ‘financial asset’– see CFM72355) financial asset has the meaning it has for generally accepted accounting purposes, but

• includes derivative contracts as defined for the purposes of Part 7 CTA09

• does not include shares (other than, where applicable, shares in a securitisation company which is party to the capital market arrangement in question).

In essence, ‘financial assets’ in the regulations take its meaning from the definition of a financial asset in paragraph 11 of International Accounting Standard 32, its UK GAAP equivalent in Financial Reporting Standard 25, or in paragraph 2 of FRS 13 where applicable. Broadly, these will be the contractual right to receive cash or other financial assets. The definition does not exclude those instruments removed from the ‘scope’ of IAS 32 by paragraph 4, provided

• they are accounted for as assets (and not as liabilities), and

• they are not shares (subject to the very limited exception above).

In addition, a derivative contract that may be out of the money (and thus accounted for as a liability) is within the rules. (But see the section below on an amendment to this definition.)

For the most part, the regulations will apply to companies involved in securitisations of mortgage, credit card and similar financial receivables. However, the definition of ‘financial asset’ will also encompass other forms of cash receivable. Where there is a securitisation of payment rights under contracts to buy and sell non-financial items, or payment rights where the contract as a whole is not a financial instrument, any such payments rights which are acquired by a securitisation vehicle separately from the remainder of the contract will in practice be treated as financial assets for the purposes of the regulations.

These might include, for example, rights to receive amounts representing consideration for sale, lease or hire, and rights to receive royalties. Whilst it may be theoretically possible that paragraphs 8 to 10 of IAS32 could require these to be accounted for otherwise than as financial assets, it can be taken that such items are not excluded even if the accountancy treatment may be debatable.

Regulation 2(2) specifies that whether an asset is a financial asset is determined at the time that the asset is first acquired, held or managed. This means it will be determined by reference to the relevant accounting standards in force at that time. Thus, companies will not fall out of the regime on account of changes in accounting definitions. Where a company agrees to acquire receivables which may come into existence in the future, it will be treated for the purposes of Regulation 2(2) as acquiring the future receivables on the date of the agreement.

Amended definition of ‘financial asset’

The Taxation of Securitisation Companies (Amendment) Regulations 2007 (SI2007/3339) amended the definition of a financial asset in the regulations to exclude derivatives over shares or land, and (in general) securities with embedded derivatives over shares or land (meaning, broadly, securities which are convertible or exchangeable into shares, or which have payments that are in some way ‘pegged’ to share values or land values.

Whole business securitisations

A consequence of the ‘financial assets’ rule is that the originating company owning the business assets in a whole business securitisation (which will often be an SPV formed within the originator group - see CFM72070) will not normally qualify as a securitisation company, because the assets it holds will in all likelihood not all be financial assets. However, if the income stream from those assets (but not the assets themselves) is separately assigned to a further separate SPV, that income stream may be a financial asset and the latter SPV might therefore qualify as an ‘asset holding company’. See CFM72410 for more details.