I have also posted this on the Financial reporting any answers, so it is not deja vu if you think you have already seen it.
A non-corporate owns and lets a number of commercial properties. This is its only business.
It borrowed from a bank on a limited recourse basis. The loan was used to purchase another tenanted commercial property. The bank's only recourse was to that property. The tenant failed, the loan went into default, the bank forced a sale of the property. Due to the ring fencing the other properties are unaffected
The write down on the fixed asset was recognised in the profit and loss. How is the reduction in the debt recognised? As the only recourse was to the property, the liability to pay went with it. It is not the same transaction as the sale of the fixed asset.
I need to nail this because I believe the tax treatment of the write off will follow the accounting treatment.
If it not part of the fixed asset asset disposal I believe it is capital. The loan was not an asset so its writing off is not either, there should not be a capital gains tax charge.
If you have stayed with me this long, thank you, so I will toss in a sub-question. When the tenant failed, the bank charged interest on the loan by rolling it up within the loan account; the facility did not provide for redrawing the loan so the treatment is questionable. Nonetheless, should the interest that was charged be recognised as an expense or not charged and treated as part of the sum written off.
I am sure other people out there are starting to come across this problem, the Socttish and Irish Banks were heavily into commercial property lending and the competition for the business was fierce hence the limited recourse facilities. The property market went south in 2008 and the banks have been moving in since the latter part of 2009.