Revenue Note for Guidance

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Revenue Note for Guidance

76B Treatment of unrealised gains and losses in certain circumstances

Summary

Section 76B provides for the taxation of unrealised profits or gains or losses on certain “financial assets” and “financial liabilities” (as defined in “relevant accounting standards” within the meaning of Schedule 17A). “Financial assets” and “financial liabilities” are collectively referred to as “financial instruments” by “relevant accounting standards” and this term has also been used in these Notes for Guidance for simplicity.

Section 76B provides that, in the case of a company carrying on a trade or profession, profits or gains or losses which are:

  1. calculated by reference to the change in the “fair value” of a financial instrument in an accounting period; and
  2. included in the profit or loss of the company for the accounting period

are to be taken into account in computing Case I or II profits or gains or losses. This treatment applies only to profits or gains on financial instruments which are trading assets and liabilities for tax purposes. In the absence of section 76B, companies could have continued to compute Case I or II profits or gains or losses on these financial instruments on a realised basis.

Additional rules apply where the companies in question are certain Irish-resident securitisation vehicles (see section 110) or leasing entities (see section 76D).

Details

Interpretation rules

(1)(a) The terms “fair value”, “financial asset” and “financial liability” as used in this section have the meanings given to them by “international accounting standards”. “International accounting standards” are defined in section 4 as International Financial Reporting Standards (IFRS – see below for further details).

(1)(b) For the purposes of this section, section 76A and paragraph 4 of Schedule 17A, references to profits or gains include references to losses and losses are to be computed in the same way as profits or gains. For the remainder of these Notes for Guidance on section 76B, references to profits or gains should be interpreted as including references to losses.

(2) Schedule 17A defines “relevant accounting standards” as IFRS and Irish generally accepted accounting practice (GAAP) to the extent that Irish GAAP is stated to embody IFRS. IFRS and Irish GAAP both consist of ‘accounting standards’. Accounting standards set out the detailed accounting rules for recognising and measuring income and expenses, assets and liabilities in a company’s financial statements. In simple terms, ‘recognition’ refers to when an item is included in the accounts and how it is recorded (e.g., as income or expense) while ‘measurement’ determines the value of the item for accounting purposes.

Taxation of unrealised gains and losses

(2) Unrealised gains and losses on financial assets and financial liabilities are taxable for an accounting period if the two conditions in subsection 2 are met. The conditions are that, in accordance with “relevant accounting standards” (meaning IFRS or Irish GAAP which is aligned to IFRS):

  1. (2)(a) the profit or gain on a financial asset or liability is calculated by reference to the change in the fair value of the asset or liability in the accounting period; and
  2. (2)(b) that profit or gain is included in the profit or loss of the company for that accounting period (this is explained further below).

This treatment applies only to gains and losses on financial assets and financial liabilities which are trading assets and liabilities for tax purposes. In the absence of this section, companies could have continued to compute Case I or II profits or gains on these financial assets and financial liabilities on a realised basis.

Additional rules apply where the companies in question are certain Irish-resident securitisation vehicles (see section 110) or leasing entities (see section 76D).

Included in the profit or loss of the company

Companies are required to include all items of income and expense in a period in profit or loss unless IFRS or Irish GAAP requires or permits otherwise [IAS 1.88/FRS 101/section 5.2(b) of FRS 102/section 5.4 of FRS 105].

Where a separate income statement is presented (which may be identified using another term such as ‘profit and loss account’ or ‘statement of profit or loss’), all items of income and expense recognised during the period in determining profit or loss will be reflected in the income statement. The ‘profit or loss before tax’ figure as per the income statement forms the starting point for the Case I/II computation.

Where a single statement of comprehensive income is presented (which may be identified using another term such as ‘statement of profit or loss and other comprehensive income’), items of other comprehensive income are excluded from the Case I/II computation because they do not represent ‘profits or gains computed in accordance with generally accepted accounting practice’. The ‘profit or loss before tax’ figure as per the statement of comprehensive income forms the starting point for the Case I/II computation.

Relevant Date: Finance Act 2019