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Bad debts: amounts payable in full

This guidance applies to periods of account beginning before 1 January 2005

An authorised accruals basis

• does not allow a write down of the value of the debt instrument at any time (FA96/S85(2)(c))
• assumes that, from the creditor’s point of view, every amount due will be paid in full as it becomes due (S85(3)(c)) but
• requires appropriate adjustments to be made under the authorised arrangements for bad debt as described in FA96/SCH9/PARA5.

»Ê¹ÚÌåÓýappse authorised arrangements for bad debt are not applicable where there is a connection between the debtor and creditor. As a consequence connected parties are unable to depart from the primary assumption that all amounts will be paid in full (CFM81100+). This does not apply to foreign exchange losses - see below.

Example

Parmit Ltd has invested in a £50,000 3-year bond. At its accounting date at the end of Year 1, it appears that the issuer is unlikely to be able to repay the bond.

»Ê¹ÚÌåÓýapp authorised accruals basis will

• assume all amounts are payable as they become due, and
• make adjustments for bad debts in accordance with the authorised arrangements.

Forex

A write down in the value of a debt is allowed where

• the debt is denominated in a foreign currency, and
• the value of the currency changes so that the value of the debt in the local currency will be reduced in the accounts.

For example, suppose that a company lends $100,000 at a time when $100,000 is worth £65,000. At the year end, the dollar has weakened and $100,000 is only worth £60,000. »Ê¹ÚÌåÓýapp company has a forex loss of £5,000. Nothing in S85 prevents this loss from being allowed.