What this post is. A structural-mechanics explainer of the mismatch between FRS 102 accounting and corporation tax for UK investment companies. It covers where the accounting and tax figures diverge (chargeable assets: listed equities, equity ETFs), where they don’t (loan relationships: bonds, gilts, deposits) and why tracking both is the hard part of investment-company accounting. Reference-quality. Accountant-primary. Low D-004 risk — this post explains the mismatch; it does not tell the reader what to do about it.
Every UK investment company carries a structural mismatch in its numbers. FRS 102 — the Financial Reporting Standard applicable in the UK and Republic of Ireland — measures most of its investments at fair value through profit or loss, so the carrying value — and the reported profit — moves every accounting period. Corporation tax, for a chargeable asset like a listed equity, does the opposite: it ignores that movement completely and taxes a gain only when the asset is actually sold, computed on the pooled cost rather than the accounts value. The accounting figure and the tax figure run on separate tracks and reconcile only at disposal. The one place they don’t diverge is loan relationships — bonds, gilts, deposits — where the tax legislation deliberately follows the accounts. Telling those two cases apart is the whole job.
In brief:
- FRS 102 measures most investments at fair value through profit or loss (FVTPL) — the carrying value moves every accounting period and that movement goes through the profit and loss account.
- For a chargeable asset (a listed equity), corporation tax ignores that movement entirely: there is no tax event until an actual disposal, computed on the s.104 pooled cost, not the accounts value.
- The two therefore run on parallel tracks — an accounting track (fair value, period-driven) and a tax-basis track (sterling pooled cost, event-driven) — and they reconcile only at disposal.
- The named exception is loan relationships: there, tax deliberately does follow the accounts (CTA 2009 s.307), so a fair-valued bond’s movement is taxed as it arises.
- Knowing which track an instrument is on — fair-value-follows-accounts (loan relationships) or fair-value-ignored-until-disposal (chargeable gains) — is the whole reconciliation.
What FRS 102 requires for investment portfolios
FRS 102 — the UK’s primary accounting framework for private companies that are not micro-entities — governs the measurement of investments in Sections 11 and 12 of its September 2024 edition. For a UK Ltd company with a portfolio of listed equities, bonds and cash, the standard’s four-way measurement menu resolves to two dominant treatments.
Amortised cost — the measurement basis for basic debt instruments under FRS 102, paragraph 11.14(a) — applies to corporate bonds, gilts and term deposits whose contractual terms meet the paragraph 11.9 “basic financial instrument” conditions. Under amortised cost, the carrying amount at each reporting date is the initial recognition amount adjusted by cumulative effective-interest-method (EIM — the rate that exactly discounts estimated future cash flows to the initial carrying amount) amortisation and any impairment. Interest income each period is opening carrying amount × effective interest rate, not the contractual coupon — so a bond bought at a discount accretes smoothly towards face value as income is recognised over its life (FRS 102, September 2024 edition, paras 11.14(a), 11.15, 11.16).
Fair value through profit or loss (FVTPL) — the measurement basis under which all changes in fair value are recognised in the profit and loss account as they arise — is mandatory for publicly-traded equity instruments under paragraph 11.14(d)(iv), and is the default for instruments within Section 12’s scope (paragraph 12.8). For a portfolio containing listed equities and equity ETFs, FVTPL is the dominant treatment. The accounting consequence: a single revaluation journal per instrument per reporting period, and that movement flows straight through to reported profit or loss regardless of whether the company has sold anything (FRS 102, September 2024 edition, paras 11.14(d), 12.8).
One important boundary: FRS 102 applies to entities above the micro-entity threshold. FRS 105 — the framework for micro-entities — has no FVTPL limb. Under FRS 105 paragraph 9.8(a), investments in shares (and similar equity instruments) are measured at cost less impairment, and there is no annual fair-value revaluation through profit or loss (FRS 105, para 9.8(a)). The accounting/tax mismatch described in this post is therefore an FRS 102 phenomenon; a micro-entity applying FRS 105 holds its listed equities at cost and the account carries no unrealised fair-value movement to reconcile.
Why corporation tax does not follow fair value for chargeable assets
The same assets that FRS 102 measures at FVTPL — listed equities, equity ETFs — are chargeable assets for corporation tax purposes: assets outside the loan-relationships regime, on which a gain is computed and charged to tax under TCGA 1992 on an actual disposal.
The regime’s legal architecture rests on three statutory provisions. TCGA 1992 s.1(2) imposes the charge. TCGA 1992 s.2A (substituted by Finance Act 2019, Schedule 1 paragraph 3) provides that chargeable gains accruing to a company in an accounting period are chargeable to corporation tax. CTA 2009 ss.2 and 4 confirm that corporation tax on profits includes chargeable gains within the total profits computation (TCGA 1992 s.1; TCGA 1992 s.2A; CTA 2009 ss.2, 4).
None of those provisions refers to the accounts. The chargeable-gains computation is driven by three figures — disposal proceeds, allowable cost and any indexation allowance frozen at December 2017 — not by accounting carrying amounts. The allowable cost for a listed equity is the sterling acquisition cost (plus qualifying incidental costs under TCGA 1992 s.38); it is set at the date of acquisition and does not move with the fair value of the shares. An upward or downward revaluation in the accounts has no effect on the tax computation whatsoever. There is no tax event, and therefore no taxable amount, until an actual disposal takes place.
The consequence is stark. Take a listed equity bought for £40,000 (at trade-date spot, for a sterling company). Suppose the year-end fair value is £45,000 — a gain of £5,000. The accounts recognise a £5,000 FVTPL gain in profit or loss. The corporation-tax computation ignores it. Augmented profits — the figure CTA 2010 s.18L defines as taxable total profits plus exempt distributions received from non-group companies, used to determine which rate of corporation tax applies — therefore include no figure from this holding either. The £5,000 has no place in the CT computation for that period. It enters only when the shares are sold, at which point the computation uses the original sterling acquisition cost, not the £45,000 accounts figure (CTA 2010 s.18L).
The s.104 pool: the tax-basis track
The allowable cost for a pooled security is maintained in the s.104 pool — the running average-cost record of every share a company holds in a given security, maintained per security under TCGA 1992 s.104. The pool has two state variables: pool quantity (units held) and pool cost (cumulative sterling cost of those units). On each acquisition the pool quantity increases and the pool cost increases by the acquisition consideration plus qualifying incidental costs. On each disposal the cost relieved is pool cost × (disposed quantity / pool quantity) — a proportionate share of the total pool cost — and the gain is net disposal proceeds minus cost relieved.
The pool tracks cost in sterling. The pool is event-driven — it updates on acquisitions and disposals, not on accounting revaluations. A year-end at which the market price has risen by 12% leaves the pool unchanged.
For companies, an indexation allowance frozen at December 2017 may reduce the computed gain on pre-2018 acquisitions. For acquisitions on or after 1 January 2018 there is no indexation and the pool cost is simply the cumulative sterling acquisition cost (TCGA 1992 s.104; FA 2018 s.26).
This is explained in full in the s.104 pool mechanics — how UK companies are taxed on listed-share disposals.
The result is two independent records for the same security: an accounting record (fair value, updated every period end) and a tax record (pool cost, updated only on acquisitions and disposals). The two diverge from the moment the market moves and converge only at disposal — at the point where the accounting record derecognises the asset and the tax record computes the gain.
The named exception: loan relationships follow the accounts
The regime for bonds, gilts and cash deposits is structurally different. These instruments are loan relationships — a company in the position of a creditor as regards a money debt arising from a transaction for the lending of money (CTA 2009 s.302(1)) — and they are governed by CTA 2009 Part 5.
The defining structural feature of the loan-relationships regime is the opposite of the chargeable-gains position: tax deliberately follows the accounts. CTA 2009 s.307(1) states it directly: “this Part operates by reference to the accounts of companies and amounts recognised for accounting purposes.” The general rule — set out in the current operative provision, CTA 2009 s.306A(1), inserted by Finance (No.2) Act 2015 — is that the amounts brought into account as credits and debits are those recognised in profit or loss under generally accepted accounting practice in respect of the company’s loan relationships. The accounting basis that applies is then confirmed by CTA 2009 s.313, which defines the amortised-cost basis and fair-value basis as the two permitted accounting treatments (CTA 2009 s.302; CTA 2009 s.306A; CTA 2009 s.307; CTA 2009 s.313; HMRC, CFM33010).
The practical consequence for an investment company’s bond portfolio:
- Under amortised cost (FRS 102’s effective interest method), the EIM interest income recognised in P&L each period is the non-trading loan-relationship credit for that period. If the bond was bought at a discount, the credit each year exceeds the cash coupon, because it includes the period’s share of discount accretion. The whole economic return is taxed as income, spread by the effective interest rate — not deferred to redemption.
- Under fair value (where the bond is measured at FVTPL), the whole period change in fair value is itself the loan-relationship credit or debit for that period. The accounts figure is the tax figure.
This is the opposite of the chargeable-gains position. The loan-relationships regime starts from the accounts and takes them as authoritative. The chargeable-gains regime ignores them.
The exclusivity of the loan-relationships regime is reinforced by CTA 2009 s.464, which provides that the amounts brought into account under Part 5 are the only amounts that may be brought into account for corporation tax in respect of the instrument. A bond is therefore entirely outside chargeable gains — not as an exemption you have to claim, but as a structural displacement. The same is true for gilts and cash deposits.
This is the mechanics of the “loan relationships follow the accounts” principle explained in how UK companies are taxed on bonds and gilts.
Laying the two tracks side by side
The divergence can be mapped against any year-end where the portfolio has moved:
| Listed equity (FVTPL) | Bond (amortised cost) | |
|---|---|---|
| Accounting treatment | Fair value at year-end; gain/loss in P&L | EIM interest in P&L; carrying amount accretes |
| Corporation-tax event? | None until disposal | Yes — LR credit follows the accounts |
| What drives the tax figure | Proceeds, s.104 pooled cost, incidental costs | P&L interest income (EIM amount, period-by-period) |
| FRS 102 / CT reconciling item? | Yes — unrealised FV gain is a book-to-tax add-back | No — the tax number is the accounting number |
A company holding both a listed equity and a bond therefore has an asymmetric reconciliation position. The equity generates a book profit (reported in P&L) that is entirely absent from the CT computation for the period. The bond’s P&L income appears in the CT computation exactly as it appears in the accounts. At year-end the company’s accounts may show a larger profit than its CT computation for the year precisely because the equity portfolio rose in value — and a smaller CT bill as a result.
The FX dimension adds a further layer for foreign-currency holdings. A USD equity held at FVTPL has its year-end carrying amount translated at the closing rate, so the P&L movement blends USD price movement and USD/GBP rate movement — both flow through P&L as a single FVTPL line (FRS 102, para 30.9(c)). For CT purposes, neither of those movements is a taxable event; the chargeable-gains computation uses trade-date sterling cost and disposal-date sterling proceeds, with no year-end retranslation. A USD bond, by contrast, is a monetary item retranslated at the closing rate each period (FRS 102, para 30.9(a)), and the FX gain or loss is within the loan-relationships regime by CTA 2009 s.328 — taxed as an LR credit or debit as it arises. The same USD/GBP move that has no tax consequence on the equity holding has an immediate tax consequence on the bond holding.
The FX mechanics of this fork are examined in full in the FX component of the fair-value movement — the monetary/non-monetary fork that decides everything.
What “realised vs unrealised” means in this context
Realised vs unrealised is the shorthand for the distinction this post turns on. For accounting purposes under FRS 102, a fair-value gain on a listed equity is recognised in P&L as it arises each period — it is an accounting profit in the period of measurement, whether or not the asset is sold. For corporation-tax purposes, a chargeable gain is realised only on actual disposal.
A consequence that sometimes surprises: the reported profit and loss account can show a substantial profit in a year in which no shares were sold, if the portfolio rose in value. The corporation-tax computation for the same year may be substantially lower, because none of that fair-value movement has become a chargeable gain. The two converge only at the point of disposal, when the s.104 pool computation produces a chargeable gain that will have no equivalent in the accounts for that period — because the accounting gain (or most of it) was already recognised in earlier periods as unrealised FVTPL movement.
A related but distinct question — whether FRS 102 FVTPL gains qualify as distributable profits for Companies Act 2006 purposes — is addressed in the ICAEW/ICAS technical release TECH 02/17 BL, Guidance on realised and distributable profits under the Companies Act 2006. The general position commonly taken in practice is that fair-value gains on instruments traded in an active market may be treated as realised (and therefore distributable), because the asset could be converted to cash at short notice on standard market terms; for instruments fair-valued using techniques and unobservable inputs the position is more nuanced (ICAEW Technical Releases — Legal and Regulatory). The distributable-reserves determination is entity-specific and depends on the facts; it is a question for the company and its advisers, not one a generic explainer can resolve.
How Portive carries both tracks
Portive maintains two independent cost/value records per security: an accounting track (fair value, functional currency, updated at each reporting period end) and a tax-basis track (sterling, event-driven). For a chargeable asset the tax-basis track is the s.104 pool; for a loan relationship the tax-basis track is the cumulative LR credits and debits, which follow the accounts and so converge with the accounting track. The year-end output surfaces, per security, the unrealised FVTPL movement on chargeable assets as a book-to-tax reconciling item, the LR credits taken from the accounts for each debt instrument and the running s.104 pool state ready to compute a chargeable gain on any future disposal. Every line traces back to its accounting source and its CT character.
Sources
Legislation:
- Taxation of Chargeable Gains Act 1992 s.1, s.2A, s.38, s.104 — charge to corporation tax on chargeable gains; allowable expenditure; the s.104 pool.
- Corporation Tax Act 2009 s.2, s.4, s.299, s.302, s.306A, s.307, s.313, s.328, s.464 — profits subject to CT; loan-relationships charge; the “follow the accounts” general rule; s.306A(1) matters; permitted accounting bases; exchange gains and losses within LR; exclusivity of Part 5.
- Finance Act 2018 s.26 — indexation freeze at December 2017.
- Finance Act 2019, Schedule 1 paragraph 3 — substitution of TCGA 1992 s.2A.
- Finance (No.2) Act 2015 — restructuring of LR bringing-into-account rules; insertion of s.306A.
- Corporation Tax Act 2010 s.18L — definition of augmented profits.
HMRC manuals:
- HMRC, CFM33010 — loan-relationships regime: core rules overview.
- HMRC, CFM26040 — the “follows the accounts” principle: overview.
Accounting standards:
- FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, September 2024 edition (Financial Reporting Council) — paras 11.2, 11.9, 11.14(a), 11.14(d), 11.15, 11.16, 12.8, 30.9(a), 30.9(c).
- FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime (Financial Reporting Council), paragraph 9.8(a) — cost-less-impairment measurement for equity investments; no FVTPL limb.
Commentary:
- ICAEW/ICAS, TECH 02/17 BL — Guidance on realised and distributable profits under the Companies Act 2006 — distributable-reserves treatment of FRS 102 FVTPL gains (indexed at ICAEW Technical Releases — Legal and Regulatory).
- ICAEW, Fixed asset investments under FRS 102 — initial and subsequent measurement under FRS 102 Sections 11 and 12.
Last reviewed: 2026-05-20.