Corporation Tax Act 2009 section 185

Change from realisation basis to mark to market

Section 185 deals with the tax adjustment that arises when a business changes its accounting basis for trading stock from a realisation basis to a mark to market (fair value) basis, and provides that the resulting adjustment is deferred until the assets are actually realised.

• When a business switches from recognising profits or losses only on realisation to valuing assets at fair value each period, a tax adjustment arises under the change of basis rules in section 182.
• Any receipt or expense relating to trading stock that forms part of that adjustment is not brought into account for tax purposes until the period in which the asset is actually realised (i.e. sold or otherwise disposed of).
• Mark to market accounting is commonly used by financial traders and values assets at their market price at each accounting date rather than at original cost, which can create a mismatch with the previous tax treatment on transition.
• Where the adjustment produces a positive receipt, the company may alternatively elect under section 186 to spread the amount over several periods rather than deferring it entirely until realisation.