Finance Act 2004

Main computational provisions U.K.

1 (1) Section 84 of the Finance Act 1996 (c. 8) (debits and credits to be brought into account) is amended as follows. U.K.

(2) In subsection (1) omit “in accordance with an authorised accounting method and”.

(3) Omit subsections (2) and (4A).

(4) For subsection (7) substitute—

“(7) Schedule 9 to this Act contains further provisions as to the debits and credits to be brought into account for the purposes of this Chapter.”.

2 (1) Section 84A of that Act (exchange gains and losses from loan relationships) is amended as follows. U.K.

(2) For subsection (3) substitute—

“(3) Subsection (1) does not apply to an exchange gain or loss of a company to the extent that it arises—

(a) in relation to an asset or liability representing a loan relationship of the company, or

(b) as a result of the translation from one currency to another of the profit or loss of part of the company’s business,

and is recognised in the company’s statement of recognised gains and losses or statement of changes in equity.

(3A) Subsection (1) does not apply to so much of an exchange gain or loss arising to a company in relation to an asset or liability representing a loan relationship of the company as falls within a description prescribed for the purpose in regulations made by the Treasury.”.

(3) Omit subsections (4) to (7).

(4) In subsection (8) after “(3)” insert “ or (3A) ”.

(5) In subsection (10) at the end add “ and power to make provision subject to an election or to other prescribed conditions ”.

3 U.K. For sections 85 and 86 of that Act (authorised accounting methods and their application) substitute—

“85A Computation in accordance with generally accepted accounting practice

(1) Subject to the provisions of this Chapter, the amounts to be brought into account by a company for any period for the purposes of this Chapter are those that, in accordance with generally accepted accounting practice, are recognised in determining the company’s profit or loss for the period.

(2) If a company does not draw up accounts in accordance with generally accepted accounting practice (“correct accounts”)—

(a) the provisions of this Chapter apply as if correct accounts had been drawn up, and

(b) the amounts referred to in this Chapter as being recognised for accounting purposes are those that would have been recognised if correct accounts had been drawn up.

(3) If a company draws up accounts that rely to any extent on amounts derived from an earlier period of account for which the company did not draw up correct accounts, the amounts referred to in this Chapter as being recognised for accounting purposes in the later period are those that would have been recognised if correct accounts had been drawn up for the earlier period.

(4) The provisions of subsections (2) and (3) apply where the company does not draw up accounts at all as well as where it draws up accounts that are not correct.

85B Amounts recognised in determining company’s profit or loss

(1) Any reference in this Chapter to an amount being recognised in determining a company’s profit or loss for a period is to an amount being recognised for accounting purposes—

(a) in the company’s profit and loss account,

(b) in the company’s statement of recognised gains and losses or statement of changes in equity, or

(c) in any other statement of items brought into account in computing the company’s profits and losses for that period.

(2) Subsection (1) does not apply to an amount recognised for accounting purposes by way of correction of a fundamental error.

(3) The Treasury may by regulations—

(a) make provision excluding from subsection (1) amounts of a prescribed description, and

(b) make provision for or in connection with bringing into account in prescribed circumstances amounts in relation to which subsection (1) does not have effect by virtue of regulations under paragraph (a) above.

(4) The regulations may provide that subsection (1) does not apply to prescribed amounts in a period of account to the extent that they derive from or otherwise relate to amounts brought into account in a prescribed manner in a previous period of account.

(5) The power to make regulations under this section includes—

(a) power to make different provision for different cases; and

(b) power to make provision subject to an election or to other prescribed conditions.

(6) The power to make regulations under this section does not apply to exchange gains or losses (but see section 84A(3A)and (8) to (10)).”.

4 U.K. In section 87 of that Act (accounting method where parties have a connection), for subsection (2) substitute—

“(2) Where this section applies the debits and credits to be brought into account for the purposes of this Chapter as respects the loan relationship must be determined on an amortised cost basis of accounting.

(2A) The provisions of subsections (2B) and (2C) apply where subsection (2) applies, or ceases to apply, with the result that there is a change of basis of accounting for a loan relationship as between one accounting period of a company and the next.

(2B) Where for an accounting period (“the relevant period”) a company brings into account debits or credits determined in accordance with an amortised cost basis of accounting, having used a fair value basis of accounting for the immediately previous accounting period (“the previous period”)—

(a) any amount by which the fair value of the relevant asset or liability at the end of the previous period (“A”) exceeds the cost of the asset or liability that would be given at that time on an amortised cost basis of accounting (“B”) shall be brought into account for the purposes of this Chapter as a debit (in the case of an asset) or credit (in the case of a liability) for the relevant period, and

(b) any amount by which B exceeds A shall be brought into account for the purposes of this Chapter as a credit (in the case of an asset) or debit (in the case of a liability) for that period.

(2C) Where for an accounting period (“the relevant period”) a company brings into account debits or credits determined on the basis of fair value accounting, having used an amortised cost basis of accounting for the immediately previous accounting period (“the previous period”)—

(a) any amount by which the fair value of the relevant asset or liability immediately before the relevant period (“C”) exceeds the cost of the asset or liability that would be given at that time on an amortised cost basis of accounting (“D”) shall be brought into account for the purposes of this Chapter as a credit (in the case of an asset) or debit (in the case of a liability) for the relevant period, and

(b) any amount by which D exceeds C shall be brought into account for the purposes of this Chapter as a debit (in the case of an asset) or credit (in the case of a liability) for that period.”.

5 U.K. In section 88 of that Act (exemption from section 87 in certain cases), omit subsection (2)(b) and subsection (3)(b).

6 (1) Section 88A of that Act (accounting method where rate of interest is reset) is amended as follows. U.K.

(2) In subsection (4) for the words from “the only accounting method authorised” to the end substitute “ the debits and credits to be brought into account for the purposes of this Chapter as respects the loan relationship must be determined on the basis of fair value accounting ”.

(3) Omit subsection (5).

7 U.K. Omit section 90 of that Act (changes of accounting method).

8 U.K. After that section insert—

“90A Change of accounting basis applicable to assets or liabilities

(1) The Treasury may by regulations provide that where in accordance with generally accepted accounting practice assets or liabilities of a company that were previously dealt with for accounting purposes on an amortised cost basis of accounting are required to be dealt with for accounting purposes on the basis of fair value accounting, the debits or credits to be brought into account for the purposes of this Chapter shall continue be determined on an amortised cost basis of accounting.

(2) The power to make regulations under this section includes power—

(a) to make different provision for different cases;

(b) to make such consequential, supplementary, incidental or transitional provision, or savings, as appear to the Treasury to be necessary or expedient; and

(c) to make provision subject to an election or to other prescribed conditions.”.

9 (1) Omit section 92 of that Act (convertible securities etc.: creditor relationships). U.K.

(2) Where at the relevant time a company holds an asset to which section 92 applies—

(a) section 92(7) (deemed disposal and re-acquisition) shall have effect as if the asset had ceased at that time to be an asset to which that section applied (but without ceasing to represent a creditor relationship of the company), and

(b) any amount falling to be brought into account under the Taxation of Chargeable Gains Act 1992 (c. 12) shall be brought into account in accordance with section 92(4) accordingly.

(3) The relevant time for this purpose is immediately before the end of the last period of account before that in relation to which sub-paragraph (1) has effect (see section 52(3) of this Act).

10 U.K. Omit section 92A of that Act (convertible securities etc.: debtor relationships).

11 (1) Omit sections 93, 93A and 93B of that Act (relationships linked to the value of chargeable assets). U.K.

(2) Where at the relevant time a company holds an asset to which section 93 applies—

(a) section 93B (deemed disposal and re-acquisition) shall have effect as if the asset had ceased at that time to be an asset to which section 93 applied (but without ceasing to represent a creditor relationship of the company), and

(b) any amount falling to be brought into account under the Taxation of Chargeable Gains Act 1992 (c. 12) shall be brought into account in accordance with section 93(4) accordingly.

(3) The relevant time for this purpose is immediately before the end of the last period of account before that in relation to which sub-paragraph (1) has effect (see section 52(3) of this Act).

12 U.K. Omit section 94 of that Act (indexed gilt-edged securities).

13 U.K. After that section insert—

“94A Loan relationships with embedded derivatives

(1) This section applies where a company is permitted or required in accordance with generally accepted accounting practice to treat the rights and liabilities under a loan relationship to which it is party (whether as debtor or creditor) as divided between—

(a) rights and liabilities under a loan relationship (the “host contract”), and

(b) rights and liabilities under one or more derivative financial instruments or equity instruments (“embedded derivatives”).

(2) The company shall be treated—

(a) for the purposes of this Chapter as party to a loan relationship whose rights and liabilities consist only of the rights and liabilities of the host contract, and

(b) for the purposes of Schedule 26 to the Finance Act 2002 (derivative contracts) as—

(i) party to a relevant contract within the meaning of that Schedule whose rights and liabilities consist only of those of the embedded derivative, or

(ii) if there is more than one embedded derivative, party to relevant contracts within the meaning of that Schedule each of whose rights and liabilities consist only of those of one of the embedded derivatives.

(3) Each relevant contract to which the company is treated as party under subsection (2)(b) shall be treated for the purposes of that Schedule as an option, a future or a contract for differences according to whether the rights and liabilities of the embedded derivative would be of that character if contained in a separate contract.”.

14 U.K. In section 95 of that Act (gilt strips), in subsection (1) for the words from “has effect” to “accruals basis of accounting” substitute “ applies ”.

15 U.K. In section 96 of that Act (special rules for certain other gilts), omit subsection (3).

16 U.K. In section 101 of that Act (financial instruments), after subsection (1) insert—

“(1A) This section does not apply where section 94A above applies (treatment of embedded derivatives).”.

17 (1) Section 103 of that Act (interpretation) is amended as follows. U.K.

(2) In subsection (1)—

(a) omit the definition of “authorised accounting method”, “authorised accruals basis of accounting” and “authorised mark to market basis of accounting”;

(b) at the appropriate places insert—

““amortised cost basis of accounting”, in relation to a loan relationship of a company, means a basis of accounting under which an asset or liability representing the loan relationship is shown in the company’s accounts at cost adjusted for cumulative amortisation and any impairment, repayment or release;”;

““fair value”, in relation to a loan relationship of a company, means the amount which, at the time as at which the value falls to be determined, is the amount that the company would obtain from or, as the case may be, would have to pay to an independent person for—

(a) the transfer of all the company’s rights under the relationship in respect of amounts which at that time are not yet due and payable, and

(b) the release of all the company’s liabilities under the relationship in respect of amounts which at that time are not yet due and payable;”;

““fair value accounting” means a basis of accounting under which assets or liabilities are shown in the company’s balance sheet at their fair value;”;

““impairment” includes uncollectability;”; and

““impairment loss” means a debit in respect of the impairment of a financial asset;”;

(c) omit the definition of “statutory accounts”.

(3) Omit subsection (5).