Annex 1: Minor Changes in the Law Change 67: Derivative contracts: meaning of “impairment loss” for the purposes of the meaning of “carrying value”: section 702
This change provides a meaning for the term “impairment loss” which is used in providing the meaning of “carrying value” in section 702 of this Act.
Paragraph 54(1) of Schedule 26 to FA 2002 provides that “carrying value”, where that term is used in that Schedule, is to be construed in accordance with paragraph 50A(3A) and (3B) of that Schedule. Paragraph 50A of Schedule 26 to FA 2002 brings into account under that Schedule an adjustment on a company changing to international accounting standards. Sub-paragraph (3A) provides that, for the purposes of that paragraph, the “carrying value” of a contract includes amounts recognised for accounting purposes in relation to a derivative contract in respect of a number of items, including “impairment losses (including provisions for bad or doubtful debts)”.
The term “impairment loss” is not defined in Schedule 26 to FA 2002. It is arguable that the reference in subparagraph (3A) to “amounts recognised for accounting purposes” brings with it the meaning of that term provided by generally accepted accounting practice. For example, paragraph 6 of International Accounting Standard 36 says: “impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.” And there are similar but not identical references to impairment losses in other standards. The term could therefore be included in section 710 of this Act (other definitions) beside a number of other terms taken from generally accepted accounting practice which have the meaning they have for accounting purposes.
However, section 103(1) of FA 1996 provides a definition of “impairment loss” for the purposes of Chapter 2 of Part 4 of that Act (loan relationships). That Chapter includes Schedule 9 to FA 1996 which has a number of paragraphs dealing specifically with impairment losses (for example, paragraphs 5ZA to 6C). Paragraph 19A of that Schedule deals with the adjustment to be made for the purposes of that Chapter on a change of accounting policy. That paragraph is drafted in very similar terms to paragraph 50A of Schedule 26 to FA 2002. It also includes the equivalent of paragraph 50A(3A) of Schedule 26 to FA 2002, with a mention of impairment losses, so that the definition in section 103(1) of FA 1996 applies.
As the provisions for derivative contracts deal with this matter in an equivalent manner to the provisions for loan relationships, it adds consistency in the construction of such equivalent provisions to adopt the definition of “impairment loss” in section 103(1) of FA 1996 for the purposes of paragraph 50A(3A) of Schedule 26 to FA 2002. That definition (together with the subsidiary definition of “impairment” in section 103(1) of FA 1996) has therefore been rewritten in section 702(4).
This change provides a clarification of the law which is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.