Recognising a borrowed asset in the accounts

Do you recognise a borrowed asset in a set of accounts, and if so how?

Didn't find your answer?

If a company were to borrow an asset for use in the business, should you recognise this in the accounts (FRS102). If so, how?

Examples: - 

- A farming company borrowers a £200k pea viner from a friend of the farmers - There is no consideration and the pea viner must be returned when the owner requests for it to be

- A tourist attraction borrowers a 1kg bar of gold worth £50k to exhibit - There is no consideration and a gold bar must be returned when the owner requests for it to be

The bar of gold is fungible, and in theory the owner could allow the company borrowing the gold to sell the bar, provided that they can provide a replacement bar of the same quality when the owner would like it back. 

I don't believe that lease accounting would/could apply, given that there would be no consideration, and that the asset is not being lent for a fixed term.

On the face of it to me, niether transaction would need to be recognised in the accounts. There is, however, a risk to the company of using the asset (eg it is damaged or lost) and therefore perhaps a disclosure is all that is required?

In the gold example, the company could generate £50k of cash from the borrowed of the asset, but would then have an obligation to buy back the same type of gold bar.  Would this just be recognised as a £50k provision in the accounts?

Replies (92)

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Replying to chrisacc1985:
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By Tax Dragon
17th Jun 2021 22:00

Contrary to how it might appear (and having put the children to bed and reread the thread... I realise I had missed large bits of it as it developed), I do see your point of view. If the transfer of (use of) an asset to the company does not create a debt (as a transfer of (use of) land wouldn't), then there hasn't been the exchange of assets that was my starting point. With land, there would be an undertaking to return the land. It could work like that with crypto.

That's your starting point.

It distinguishes itself from a normal repo because the transfer isn't in return for a cash loan. (Not sure that's relevant, I'm just saying.)

Possibly if there was no disposal of the crypto by anyone in the chain of borrowers, I'd now find myself agreeing with you. But I can't get myself to the place where I can accept that the asset could be disposed of down the chain without also being disposed of by everyone (higher up) in the chain. (No wordplay intended this time, with "chain".)

(Edited for some awful typos!)

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Replying to Tax Dragon:
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By chrisacc1985
17th Jun 2021 23:40

Thanks Tax Dragon. It’s good to be reassured that I’m not totally bonkers.

As mentioned above, the company will loan the coins out in exchange for interest paid in the same coin. The borrower sells the crypto and then buys the crypto back just before the loan is required to be repaid. If the price of the crypto goes down, the borrower makes a profit.

In your view, this would appear to create a disposal right the way up the chain. The asset is fungible, however, and each person in the chain still has a right to their original quantity of that fungible asset. I think because of this it could be argued that the sale further down the chain hasn’t created a disposal further up the chain (although this may be a more tenuous conclusion).

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Replying to chrisacc1985:
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By paul.benny
18th Jun 2021 08:16

I'm sorry that I haven't grasped your point of view. I'm certainly not clear how you believe this arrangement should be accounted for. I'm not even clear whether you are considering the position of the lender or the borrower. Even when you disagree (eg above concerning derivatives), you don't explain why, so there's no possibility of exploring your thinking.

If I may repeat an earlier point, the apparent lack of the documentation for this loan is the source of the difficulty. Knowing the borrower's obligation to the lender helps tell you you to account for it. If that obligation is based on a fixed amount of crypto - ie a varying amount of GBP, then I really do think that is a derivative or some other complex financial instrument.

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Replying to paul.benny:
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By chrisacc1985
18th Jun 2021 08:34

The company is both the borrower and lender. It is borrowing the crypto from the director and it is lending it to an unknown third party on a peer to peer crypto lending site. Instead of lending it out, it may also use as collateral to enter into a perpetual derivative. A perpetual derivative (perp) is a brand new type of instrument only found in crypto where the value whose value mirrors the price of crypto. It does this by either paying the holders or the perp to hold on to the their exposure, or by charging the holders a fee, incentivising them to exit their position.

My understanding is that derivatives are financial instruments and given that the asset being lent and the consideration being received is all crypto, and given that neither HMRC or ICAEW accept that crypto is a currency, the derivative rules don’t appear to apply.

There are coterminous emails showing that the crypto loans to the company are interest free and repayable on demand. They don’t specify what the company may use the loans for, and the client is remedying this. It is implicit that the loans need to be repaid in crypto, in the same way that if I loaned a bar of gold I would want a bar of gold back. Following your point, I will tell the client that the new, clearer agreement needs to make this explicit.

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Replying to chrisacc1985:
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By paul.benny
18th Jun 2021 08:44

An embedded derivative arises when some portion of a contract's cash flows are modified in relation to changes in a variable, such as an interest rate, commodity price, etc. I think that may be what you have here.

Although the liability is a fixed amount of coins, that's not your reporting currency, which is presumably GBP. The GBP liability to lender varies according to value of the coins lent.

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Replying to paul.benny:
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By chrisacc1985
18th Jun 2021 09:04

Does the loan agreement (contract) involve any cash flows though? It is a loan of a fungile intangible asset.

I agree that GBP is presentation currency and ”liability” value varies. This is just the accounts treatment though, and has no bearing on the substance of the agreement.

I’m not sure what the correct treatment is. The treatment I am considering is that the loan isn’t recognised in the accounts at all, given that the company doesn’t own the asset. Perhaps only a disclosed note explaining that there is a loan of crypto.
Admittedly, if the company has the right to dispose of the asset, this treatment is problematic.

The only user of the financial statements is going to be HMRC, and given how long I have spent on this now, and given that the situatioN seems unique and that there is no guidance and expertise out there, I am thinking of just deciding on a justifiable treatment and then stating what we have done on the CT600. Should HMRC wish to pick through it themselves, they would be welcome too!

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Replying to paul.benny:
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By chrisacc1985
18th Jun 2021 09:06

Does the loan agreement (contract) involve any cash flows though? It is a loan of a fungile intangible asset.

I agree that GBP is the presentation currency and ”liability” value varies. This is just the accounts treatment though, and has no bearing on the substance of the agreement.

I’m not sure what the correct treatment is. The treatment I am considering is that the loan isn’t recognised in the accounts at all, given that the company doesn’t own the asset. Perhaps only a disclosed note explaining that there is a loan of crypto.
Admittedly, if the company has the right to dispose of the asset, this treatment is problematic.

The only user of the financial statements is going to be HMRC, and given how long I have spent on this now, and given that the situatioN seems unique and that there is no guidance and expertise out there, I am thinking of just deciding on a justifiable treatment and then stating what we have done on the CT600. Should HMRC wish to pick through it themselves, they would be welcome too!

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Replying to chrisacc1985:
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By paul.benny
18th Jun 2021 09:37

HMRC aren't the only user. The accounts have to be filed at Companies House and other parties may request them (eg lenders).

I'm in no doubt that the company has an asset and a liability in respect of the borrowed coin. Excluding them means that the financial statements will not show a true and fair view and will not be Companies Act compliant.

There is also a logical inconsistency in that the company is generating a return on an asset it does neither owns nor rents.

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Replying to paul.benny:
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By chrisacc1985
18th Jun 2021 10:10

In this case, considering only the activities that the company are the ones that they are currently engaged in, HMRC are the only users. There are no lenders beyond the director. The two third parties that the company deal with are its bank and the peer to peer lending site. It is a valid point, however, that the bank and the peer to peer lending site may be interested in the company's accounts.

How is the position any different to that of a borrowed pea viner or a borrowed bar of gold?

A farmer using a borrowed pea viner is generating a return on an asset it does not own or rent.

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Replying to paul.benny:
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By chrisacc1985
18th Jun 2021 09:07

Does the loan agreement (contract) involve any cash flows though? It is a loan of a fungile intangible asset.

I agree that GBP is the presentation currency and ”liability” value varies. This is just the accounts treatment though, and has no bearing on the substance of the agreement.

I’m not sure what the correct treatment is. The treatment I am considering is that the loan isn’t recognised in the accounts at all, given that the company doesn’t own the asset. Perhaps only a disclosed note explaining that there is a loan of crypto.
Admittedly, if the company has the right to dispose of the asset, this treatment is problematic.

The only user of the financial statements is going to be HMRC, and given how long I have spent on this now, and given that the situatioN seems unique and that there is no guidance and expertise out there, I am thinking of just deciding on a justifiable treatment and then stating what we have done on the CT600. Should HMRC wish to pick through it themselves, they would be welcome too!

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Replying to chrisacc1985:
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By WhichTyler
19th Jun 2021 18:16

chrisacc1985 wrote:

What if the borrower has the right to dispose of the gold bar, provided that they returned a gold bar of the same quality?


Then you have a sale of a gold bar (to the 'borrower', now) and a future obligation (on the 'borrower') to deliver a gold bar of a certain specification on a future date. The current value of that future asset (in the 'lenders' accounts) will depend on market value of similar contracts https://www.cmegroup.com/trading/metals/precious/gold.html#
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By Matrix
18th Jun 2021 00:27

I don’t know anything about crypto currency but isn’t your client just trading in crypto currency as a financial trader? So it is a current asset/inventory which you would mark to market regardless of whether he has it or has lent it.

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Replying to Matrix:
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By chrisacc1985
18th Jun 2021 08:12

I had considered this, however the crypto isn’t being consumed or sold as part of the main activity. It’s more that it is an asset that is being used to carry out the activities. Plant and machinery seems like a closer fit than inventory. When I landed on this characterisation, this was when I started considered the pea viner analogy.

Having said this, in a way it’s more like the company is leasing out the crypto. Are leased assets in the books of the lessor treated as inventory? I need to look into this!

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Replying to chrisacc1985:
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By paul.benny
18th Jun 2021 08:26

chrisacc1985 wrote:
Are leased assets in the books of the lessor treated as inventory?

No

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Replying to paul.benny:
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By chrisacc1985
18th Jun 2021 08:36

Thanks. Usually P&M then?

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Replying to chrisacc1985:
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By paul.benny
18th Jun 2021 09:10

No

Although that does depend on whether you're reporting under FRS102 or IFRS16.

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Replying to paul.benny:
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By chrisacc1985
18th Jun 2021 09:13

102.

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Replying to chrisacc1985:
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By paul.benny
18th Jun 2021 09:20

FRS102 para 20.17 and following set out how lessors account for leases.

When you read it, you may conclude that's not the appropriate accounting treatment.

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Replying to paul.benny:
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By chrisacc1985
18th Jun 2021 09:35

In the company's capacity as a lender, the "lease" would be more akin to an operating lease. 20.24 states "A lessor shall present assets subject to operating leases in its statement of financial position according to the nature of the asset."

Non-investment intangible fixed asset then. That is assuming it should be recognised in the accounts at all, given that the substantial risks and rewards of ownership remain with the director at the top of the chain.

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Replying to chrisacc1985:
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By paul.benny
18th Jun 2021 09:40

chrisacc1985 wrote:
... that the substantial risks and rewards of ownership remain with the director at the top of the chain.

That's not what you've described. Nor is that the FRS102 definition of an asset.

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Replying to paul.benny:
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By chrisacc1985
18th Jun 2021 10:43

Apologies, thank you for pointing that out.

"2.15 (a) An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
(b) A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

2.16 Some items that meet the definition of an asset or a liability may not be recognised as assets or liabilities in the statement of financial position because they do not satisfy the criteria for recognition in paragraphs 2.27 to 2.32. In particular, the expectation that future economic benefits will flow to or from an entity must be sufficiently certain to meet the probability criterion before an asset or liability is recognised.

2.27 Recognition is the process of incorporating in the statement of financial position or statement of comprehensive income an item that meets the definition of an asset, liability, equity, income or expense and satisfies the following criteria:
(a) it is probable that any future economic benefit associated with the item will flow to or from the entity; and
(b) the item has a cost or value that can be measured reliably"

I am now beginning to agree with you that the asset should be recognised. Presumably though, this would mean that the pea viner should be too.

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Replying to paul.benny:
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By chrisacc1985
18th Jun 2021 10:57

Apologies, thank you for pointing this out.

"2.15 The financial position of an entity is the relationship of its assets, liabilities and equity as of a specific date as presented in the statement of financial position. These are defined as follows:
(a) An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
(b) A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

2.16 Some items that meet the definition of an asset or a liability may not be recognised as assets or liabilities in the statement of financial position because they do not satisfy the criteria for recognition in paragraphs 2.27 to 2.32. In particular, the expectation that future economic benefits will flow to or from an entity must be sufficiently certain to meet the probability criterion before an asset or liability is recognised.

2.27 Recognition is the process of incorporating in the statement of financial position or statement of comprehensive income an item that meets the definition of an asset, liability, equity, income or expense and satisfies the following criteria:
(a) it is probable that any future economic benefit associated with the item will flow to or from the entity; and
(b) the item has a cost or value that can be measured reliably"

I am not coming to agree that the asset does need to be recognized in some way This would presumably mean that the pea viner would also need to be recognised?

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Replying to chrisacc1985:
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By paul.benny
18th Jun 2021 11:13

Your borrowed pea viner is comparable to a week's hire of a car - the cost goes through P&L as an expense. But here it's a barter transaction that probably stays below the radar.

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Replying to paul.benny:
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By chrisacc1985
18th Jun 2021 12:53

I'm not clear why the pea viner is comparable to a week's car hire and the crypto isn't? Both have no fixed return date and no consideration.

The definition of a lease per FRS102 requires consideration and a fixed return date and so I don't think the pea viner could be treated like the car hire. Presumably 2.27 would apply to the pea viner, but as you say would likely go under the radar?

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Replying to chrisacc1985:
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By paul.benny
18th Jun 2021 13:45

Sorry - I'm losing the will here.

I've explained how I believe the crypto should be accounted for in the books of the borrower. I really really don't care about the hypotheticals.

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Replying to paul.benny:
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By chrisacc1985
18th Jun 2021 13:54

No problem. I can appreciate that.

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By Tax Dragon
18th Jun 2021 10:03

Because comments do not appear in the order they are made, grown up discussions where views may change and develop as the discussion proceeds (as mine have - I now think my initial disposal-in-exchange-for-a-debt-asset stance, which I acknowledged at the time was more instinctive than considered, could be wrong) are really hard to follow in this format. Older and wiser contributors than me - Basil being one such - never use the reply button. I think I will adopt that approach, henceforth.

I also realise I accused you of using land as an (aff) example. I apologise, you didn't.

Let me clarify my closing post yesterday. You appear ("In your view, this would appear to create a disposal right the way up the chain") to have interpreted it as meaning that the disposal down the chain triggers the disposals up the chain. That's not what I meant. Where you have been discussing "risk and reward" with Paul, you could similarly discuss "beneficial ownership" with me - meaning that in my view the disposal happens at the point the loan is made, not at the point the second borrower once removed disposes of the asset.

Your argument ultimately rests on the idea that a replacement asset indistinguishable from the original asset is [the same thing as] the original asset. I don't think it is. And (more importantly) I don't think the law thinks it is.

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Replying to Tax Dragon:
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By chrisacc1985
18th Jun 2021 11:09

I appreciate this TD.

The client finally seems to be accepting that he needs to pay for some outside advise!!

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Replying to chrisacc1985:
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By Hugo Fair
18th Jun 2021 12:48

Praise be!
You can always show him this thread to justify your fees to-date ... and maybe he'd like to put a substantial float behind the bar at whichever hostelry Paul favours - plus some comestibles (coal?) for TD.

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Replying to Hugo Fair:
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By chrisacc1985
18th Jun 2021 12:56

X-)

I will make the suggestion!

All assistance gratefully appreciated.

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Replying to Tax Dragon:
paddle steamer
By DJKL
18th Jun 2021 13:03

I concur, if "same" asset returned then no disposal, if "similar" asset but not "same" returned there, to my mind anyway, has to have been a disposal.

Above to me applies re the original "lender"

Accounting treatment within the borrower is imho a wholly different question re recognition and valuation at the year end dates and for that the starting position, barring anything express within legislation, has to be the financial reporting standards adopted by the "borrower" and how they dictate what gets shown, this imho will not necessarily follow the legal ownership position .

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Replying to DJKL:
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By chrisacc1985
18th Jun 2021 13:34

Even if asset fungible?

Not clear what you are suggesting for the accounting treatment for the borrower, but accept that it may not follow legal ownership position.

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Replying to chrisacc1985:
paddle steamer
By DJKL
18th Jun 2021 14:00

But is it fungible for tax purposes is the $1million question, see this US article from a few years back discussing the likely issues with the IRS.

https://www.forbes.com/sites/robertwood/2017/09/21/irs-could-tax-loans-o...

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Replying to DJKL:
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By chrisacc1985
18th Jun 2021 14:15

It would seem like a very unfair treatment, but I accept that there is an argument that it is not.

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By Tax Dragon
18th Jun 2021 15:39

DJKL wrote:

But is it fungible for tax purposes is the $1million question.

I really don't think it is. (And not just because the word "fungible" does not appear in TCGA (prove me wrong).)

What you do have in TCGA is s21 (defines asset and disposal), s104 (defines securities, in a way that I would say included crypto) and s263AA (which, as DJKL pointed out in the other thread, Richard agreeing, defines securities in a way that does not include crypto) [and of course much else besides, but, OP, you haven't said which (other) bits you think relevant].

I'm out of this thread now unless I see something that changes my mind. Common sense/logic (I know I say apply law not logic, but here IMHO they agree) says that if there is a particular time at which no-one in the chain holds the asset, then the asset must by that time have been disposed of. This bleeding obvious point has been made countless times already, including by Hugo and gillybean04. All I am saying is that the point of disposal by the initial 'lender' is not when the asset leaves the chain, but was when the initial 'loan' by which beneficial ownership was passed to his company was made. Which, btw, DJKL and Richard said ages ago.

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By chrisacc1985
18th Jun 2021 15:50

No problem if you are bowing out now Tax Dragon. Thanks for your help.

Very useful references: -
- S21(2) (a) "references to a disposal of an asset include, except where the context otherwise requires, references to a part disposal of an asset" - a loan is not a disposal and therefore the context would seem to require that a disposal has not taken place.
- s21(2)(b) "there is a part disposal of an asset where an interest or right in or over the asset is created by the disposal, as well as where it subsists before the disposal, and generally, there is a part disposal of an asset where, on a person making a disposal, any description of property derived from the asset remains undisposed of."
- - This presupposes that a disposal has taken out, which in the case of a loan there is nothing else indicating that a disposal has taken place

To counter your point "if there is a particular time at which no-one in the chain holds the asset, then the asset must by that time have been disposed of" HMRC do not consider theft to be a disposal - https://www.gov.uk/hmrc-internal-manuals/cryptoassets-manual/crypto41550

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Replying to chrisacc1985:
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By Tax Dragon
18th Jun 2021 15:51

Before I left, I meant to ask... Do let us know (in as much detail as you are permitted) the advice your client obtains.

(On your last point, theft is different, as well you know. The entitlement is to the asset stolen, not "similar" assets, to borrow a word from s263AA.)

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Replying to Tax Dragon:
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By chrisacc1985
18th Jun 2021 15:52

I will if I think on. Thanks again.

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Replying to chrisacc1985:
paddle steamer
By DJKL
20th Jun 2021 13:24

Also, ignoring the tax position of the party owning at the outset , any learned researched opinions re the accounting treatment within "the borrower" would be welcome, it is an interesting question. (In fact there is likely a newish branch of accounting to be developed regarding the various types of instruments that are developing, I doubt the position will remain static (which may be a concern if this were to be long term)))

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Replying to DJKL:
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By chrisacc1985
21st Jun 2021 14:24

I have made a note to revert on AW in a couple of weeks. Loans aren’t uncommon on crypto platforms, and so the lack of mention of them in HMRC’s crypto manual perhaps indicates it’s a unresolved point within HMRC.

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By chrisacc1985
13th Oct 2021 09:54

As an update, the outsourced consultancy also drew a blank.

From speaking to HMRC, I understand that there is going to be an update to the cryptocurrency manual in December (in time for Jan 2022 personal tax filing deadline) which will include HMRC's view on crypto lending. I am therefore waiting until then before I submit returns for my client.

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Replying to chrisacc1985:
Stepurhan
By stepurhan
13th Oct 2021 15:26

While I still think the situation is odd, thank you for coming back with an update. Too many querists disappear leaving an issue unresolved.

I am also interested to hear about the forthcoming update regardless. Though none of them lend it (that I am aware of) I do have clients who invest in crypto. An update worth reading for me.

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