Confusion over the tax treatment of convertible debt in accounts drawn up under international financial reporting standards could see companies rush to change year-end dates and buy back loans to save money.
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Last week, property company Capital & Regional announced it was buying back 28% of its uninsured convertible loan stock, at a cost of £27m, to offset it against tax. The practice is allowed under UK GAAP, but is not permitted under current government rules for taxing IFRS accounts.
To avoid having to switch to IFRS at the beginning of this year, C&R brought its year-end date forward one day to 30 December, enabling it to make the purchase under UK GAAP this year and potentially buy back further loan stock in coming months.
‘We don’t really want to cock a snook at the system and we wouldn’t normally do this, but the economics of the situation overcame the presentational issues,’ FD William Sunnucks told Accountancy Age.
Sunnucks argued that the move was made to maximise shareholder value, with the company expecting to save over £12m from the buyback. He said shareholders had accepted the situation, and insisted the company would still provide full IFRS disclosure and comparative accounts this year.
Similar situations could hit many companies with convertible debt. While listed companies with December year-ends may have missed the opportunity, others will be frantically trying to buy back as much loan stock as possible before the new financial year, or extend their year-ends by months to offer more time.
‘The government has said it will do something, but it is by no means certain they will or what the result will be,’ said PwC tax partner Derek Jenkins. ‘Any company with convertible debt would be best dealing with it in its current accounting period or face potentially disastrous consequences.’