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This guidance applies where a company bifurcates a loan asset under IAS 39 or FRS 26. Bifurcation is not permitted for financial assets under FRS 102 (unless IAS 39 is applied) or IFRS 9.
For further details of the accounting permutations see CFM52215.
Where a security meets the conditions of CTA09/S645, there are three consequences.
CTA09/S670 applies to ensure that profits or losses are taxed once and only once.
Although the heading to CTA09/S670 refers to the embedded option being exercised, the section in fact applies to any disposal of the right to acquire shares. It will therefore apply both
where
Where the security converts into shares, and TCGA92/S127 treats the shares as comprising the same asset as the original security, there will not be a chargeable occasion until the company
disposes of some or all of the conversion shares. At this point, the rule in CTA09/S670(5) applies in order to eliminate from the capital gains computation those amounts that have already
been taxed.
This is achieved by increasing the acquisition cost allowable under TCGA92/S38(1)(a) by the amount of any net profit that has been taxed, or restricting it by the amount of any net loss that
has been relieved. If the restriction exceeds the acquisition cost, the excess is added to the disposal consideration.
The net loss, and net profit, are defined in terms of three variables - G, L and CV. G is the amount of chargeable gains accruing to the company under CTA09/S641, both in the accounting
period of the disposal and in previous periods. Similarly, L is amount of allowable losses accruing under CTA09/S641. Where only some of the conversion shares are disposed of, G and L are
the gains or losses referable on a just and reasonable apportionment to those shares.
CV is the amount by which the carrying value of the host contract at the date when the option is exercised exceeds its value when the company first acquires the convertible (or when it first
starts to bifurcate). In other words, it is the amount that has been taxed under loan relationships.
Thus a net profit has already been taxed on the convertible if the sum of G and CV is greater than L. There will have been a net loss if L is greater than the sum of G and CV.
CTA09/S670(3) applies to any event treated as a disposal of the security, including an exchange of the security for shares in a company other than the issuing company. The capital gains
computation is modified in exactly the same way as described above. If the sum of G and CV exceeds L, the acquisition cost is increased by the excess. If L exceeds the sum of G and CV, the
acquisition cost is reduced by the amount of the excess. If the net loss exceeds the acquisition cost, the extra amount is added to the disposal consideration.
