Changes to interest calculations on amortised costs presents new problems

Changes to interest calculations on amortised costs presents new problems

Wed 08 Mar 2017

Rules will be introduced for insurers regarding the calculation of interest on an amortised cost basis to provide an alternative to fair value accounting.

HMRC have proposed a solution to avoid insurance companies being required to include interest on loan relationship losses on assets valued at fair value in their accounts. While it is to be welcomed that HMRC have recognised the issue, the proposed solution is impractical and would result in additional compliance costs.

Insurance companies will generally be net interest recipients rather than payers, however circumstances can occur when they are net payers. Unlike banks, where loan relationship assets are generally held to match loan relationship gains, insurance companies typically hold loan relationship assets to back policyholder liabilities. These assets are typically valued at fair value and where there is a fall in value, life companies may become net interest payers.

HMRC have recognised this potential situation and have provided an election mechanism where insurance companies can elect to be taxed based on amortised cost in respect of assets that are held at fair value in the accounts.

While an election is welcome, the amortised cost basis is generally not used for accounting purposes and so if the election is to be made, then additional compliance and IT costs will be incurred to set up and to maintain an amortised cost system. Further, some loan relationship assets like bond OEICS and unit trusts which do not have a maturity date and so it would be impossible for these assets to be valued at amortised cost.

While insurance companies will welcome the fact that HMRC have recognised their particular circumstances, the additional costs would appear to be disproportionate to resolving the issue for many companies.

For more information contact Stephen Brown ( Paul Clement ( or Ian Thomson (


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