CFM76050 | Other tax rules on corporate finance: change of accounting basis: ‘post-cessation’ gains and losses

Change of accounting policy following cessation of loan relationship/derivative contract

CTA09/S318 and S615

In certain cases it may be necessary to give effect to changes in accounting policy in respect of a loan or derivative, even though the loan or derivative in question has already been disposed of or terminated. For example, where a loan or derivative has been brought to a premature end, profits and losses in respect of the instrument may be spread over the original term of the loan or derivative.

Where there is a change in accounting policy, it may be necessary to bring into account a transitional adjustment in respect of such amounts. This would be necessary, for example, if such amounts cease to be spread under the new accounting treatment.

S318 and S615 apply equivalent rules to those that apply on a change of accounting basis. They treat the amount outstanding at the end of the period immediately before the change of accounting policy as the carrying value of the loan relationship or derivative contract.

For the purposes of computing adjustments on a change of accounting policy, this amount outstanding is compared with the amounts in the opening accounts, and the difference is brought in as a debit or credit in the first period of the new accounting policy.

“Amount outstanding” is defined in S318(5) and S615(5). It means the deferred income or loss in the balance sheet of the company, which has not so far been brought into account as a profit or loss under Part 5 or Part 7.