Financial arrangements subject to this method
The reliance on financial reports method applies to financial arrangements that meet the following requirements:
- The entity starts to have the financial arrangement in the income year in which it makes the election or later income years.
- The arrangement is recognised in the financial reports relied on.
- It is reasonably expected that the amount of the overall gain or loss the entity makes from the arrangement determined in accordance with the financial reports is, or will be, the same as the amount of the overall gain or loss the entity makes as determined according to TOFA, if the reliance on financial reports method election did not apply (same overall gain or loss test).
- The results of the method used to determine the gain or loss on a financial arrangement for each income year in the financial reports is not substantially different to the results from the methods that would be applied by the rest of TOFA if the reliance on financial reports method election did not apply (results not substantially different test).
However, the election will cease to apply to a particular financial arrangement if any of the above requirements are no longer satisfied for that financial arrangement. The election will cease to apply to that financial arrangement from the start of the income year in which this occurs. When this happens, the entity must make balancing adjustment under subsection 230-430(5).
Applying the tests
An entity must assume that both a fair value method election and a foreign exchange retranslation general election have been made when determining whether:
- an entity reasonably expects to make the same overall gain or loss on a financial arrangement
- the results of the financial reports method are not substantially different from the results from the methods that would apply if the financial reports method did not apply.
This prevents taxpayers from needing to have valid elections in place solely to ensure the financial reports method applies to certain financial arrangements.
However, in applying these tests, do not assume that an election for portfolio treatment of fees, premiums and discounts is made under the accruals method under Subdivision 230-B.
If the election for portfolio treatment of fees, premiums and discounts has not been made, the relevant comparisons in applying these tests are the accruals/realisation methods as if that election was not made.
If the election for portfolio treatment of fees, premiums and discounts has been made, the relevant comparisons in applying these tests are with the accruals/realisation methods on the basis that election has been made.
Eliminated accounting intra-group transactions
As stated above, for the financial reports method to apply to a financial arrangement, the arrangement must be recognised in the financial report.
However, where a financial arrangement is not recognised in the consolidated financial report merely because it has been eliminated as an intra-group transaction of the accounting consolidated group, paragraph 230-410(1)(c) is taken to be satisfied in relation to a financial arrangement.
As a consequence, the financial reports method can be applied to the eliminated accounting intra-group transaction.