CFM33220 – Corporate Finance Manual – HMRC Internal Manual


Accounting treatment

IAS39 / FRS102 / FRS105

IAS39, FRS102 and [FRS105] (and formerly FRS 26) require companies to assess their financial assets at each reporting date to see if there is objective evidence that a financial asset or group of assets is impaired. When it comes to borrowings or trade payables, it is a similar – but not identical – process to making a provision for doubtful or bad debts at the end of the financial year.

The standards set specific rules for identifying and measuring impairment losses. There is more detail on the process under IAS39 is at CFM21670. With the exception of assets recognized at fair value through profit or loss (where any impairment loss will be reflected in the overall change in fair value), impairment losses are recognized in profit or loss, as are any credits resulting from reversal of impairment.


IFRS9 takes a different approach to impairment losses (also known as credit losses). The new standard will change the accounting for bad debts on financial assets (including trade receivables) from an “incurred loss” basis to an “expected loss” basis. This will accelerate the recognition of impairment losses.

This will require:

  • Recognition of a 12-month expected loss figure for all eligible financial assets on initial recognition;
  • Recognition of lifetime expected losses for all qualifying financial assets when there has been a significant increase in credit risk since initial recognition and the asset has fallen below investment grade (i.e. when credit risk is assessed on a collective basis for a group of assets, i.e. individually identifiable).

A simplified approach to recognizing expected lifetime losses for all normal trade receivables is available, but not required, for certain contract receivables, trade receivables and lease balances.

Note that companies that adopt FRS102 have the option of applying the recognition and measurement requirements of IFRS9.

Tax treatment

Loan relationships with creditors

If the company correctly applies the relevant standard to arrive at a debit amount recognized in profit or loss for impairment losses (or a credit amount for the reversal of impairment losses), the debit will be deductible (or taxable credit) in accordance with standard normal calculation provisions. This will be the case whether the company applies an “incurred loss” model according to IAS39 / FRS102 / FRS105 or an “expected loss” model according to IFRS9.

The main exception to the accounting treatment of impairment losses is when the debt is between related companies (CFM35000+).

Trade debts and other non-lending relationships

The situation for relevant non-lending relationships, such as trade debts, is effectively the same as for creditor-to-creditor lending relationships. When an impairment occurs, this brings the debt back into scope and the impairment or recovery is taxed as if it were a matter of lending relationships – S479(2)(c) ), S481(3)(d) – see CFM41000+.

Again, no relief is normally available when the debt is between related companies (CFM35000+).


Example: IAS39

A bank has statistical evidence, based on data collected over a number of years, that a rise in mortgage rates is correlated with an increase in credit card delinquencies by customers with poor credit histories. In 2007, mortgage rates increased and the bank recorded an impairment loss – calculated in accordance with statistical data – on its portfolio of credit card debts owed by this group of customers. The impairment loss – provided it is correctly calculated – is in accordance with IAS 39, even if it cannot be identified with individual amounts due from individual customers, and it will be deductible for tax purposes.


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