This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members to account for a Company Voluntary Arrangement (CVA). The helpsheet addresses the question as to how and when the effects of a CVA are to be reflected in the financial statements of the company under FRS 102.

Members may also wish to refer to the following related guidance:

• Insolvency at a glance

A CVA is an insolvency procedure which is supervised by an insolvency practitioner (IP), the ‘supervisor’. It involves a formal arrangement with the creditors of the company, whereby the creditors agree to a payment plan over time which may include a reduction in the debt due to them. The CVA captures all unsecured creditors at the time of the agreement which is passed by a majority of creditors. Any dissenting creditors are bound in the arrangement.

Whilst a CVA is in progress, the creditors also agree not to pursue their own alternative legal redress, though a secured creditor can usually take steps to enforce its security. However, if the supervisor fails the CVA then the creditors will once again be able to sue for their debts or apply to the courts for a winding-up order.

The accounting implications of a CVA in the preparation of the company’s financial statements are driven by the nature of the CVA agreement which has changed the contractual relationship underpinning these financial liabilities.

Prior to the CVA, creditors would normally have been accounted for under FRS 102 paragraph 11.14(a) at amortised cost using the effective interest method or, in the case of non-interest bearing debt instruments payable within one year on normal business terms (e.g. trade creditors), at an undiscounted amount.

The CVA changes the contractual terms between the reporting entity and the creditor. The company will pay agreed sums under the terms of the CVA to the supervisor who will then pay the creditors under the CVA, usually at the end of the CVA term and after deducting their fees and costs.

Under FRS 102 these changes in the contractual terms result in either a ‘revision’ to the estimates of payments or a ‘substantial modification’ to the terms of the financial liability. Neither ‘revision’ or ‘substantial modification’ are defined and therefore the distinction will be a matter of judgement.

Revision

If the change is considered to be a ‘revision’, then the requirements of FRS 102 paragraph 11.20 should be followed. The entity shall recalculate the carrying amount of the financial liability by computing the present value of estimated future cash flows at the original effective interest rate. The adjustment shall be recognised in profit or loss.

Substantial modification

If the change is considered to be a ‘substantial modification’, then the requirements of FRS 102 paragraph 11.37 should be followed. A ‘substantial modification’ shall be treated as an extinguishment of the original financial liability and the recognition of a new financial liability. Paragraph 11.38 confirms that the difference between the carrying amount of the financial liability extinguished and the new financial liability recognised shall be recognised in profit or loss.

Special case – Tax liabilities

A financial instrument can only arise from a contract. As such, liabilities for current tax (such as corporation tax) and VAT are not financial instruments and are not accounted for under sections 11 or 12 of FRS 102. As a result there is no requirement to discount the liability (indeed it is prohibited for current tax liabilities by virtue of FRS 102 paragraph 29.17). The tax liability should be measured at the amount of tax the entity expects to pay in line with the CVA. Any difference between the new carrying value and the original carrying value is recognised in profit or loss.

In order to arrive at a true and fair view, it is likely that disclosure of a contingent liability would be required to explain the effect of a failure to adhere to the terms of the CVA. Such a failure which would normally result in the whole of the original debts become payable on demand.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.