CFM52030 - Derivative contracts: the matters and computational rules: changes of accounting policy

CTA09/S613-615

Company periods of account beginning on or after I January 2016

The provisions relating to changes in accounting basis were rewritten by F(2)A15. CTA09 S613 and 614 set out a simple but comprehensible rule for dealing with a change in the “adjusted tax carrying value” of an asset or liability arising either from a change in accounting basis, or a company’s tax status (such as becoming connected to another company), that requires a change in the accounting basis to be applied for tax. The rules work in the same way as those for loan relationships, see guidance beginning at CFM33140.

Tax-adjusted carrying value is defined in S702, see CFM52033.

A slightly different rule in S615 applies where a company is no longer a party to a derivative contract, but amounts are recognised in its accounts as a result of a related transactions a change in accounting basis impacts those amounts.

Circumstances in which the general rule applies

S613 sets out the circumstances in which the rule in S614 or 615 are to be applied.

The first requirement that there is a change in the accounting basis that a company applies from one company period of account or accounting period to the next. It is then required that the change in basis to be applied arises because either:

  • A provision within the derivative contracts rules (CTA09/PT7) requires a particular basis of accounting to be applied for one period which differs from that applied in the immediately preceding period; or
  • The company changes its accounting policy.

It is also required that the accounting basis applied before the change (the old basis) must accord with the law or accounting practice applicable before the change and the accounting basis applied after the change (the new basis) must accord with the law or accounting practice applicable after the change.

However, the general rule does not apply where the change in basis is made to comply with amending legislation that did not apply to the old period. Amending legislation would normally be expected to specify the transitional arrangements to be applied. In particular, special rules apply where the tax-adjusted carrying value of a derivative contract, immediately after the changes made by F(2)A 15 take effect, differs from the corresponding amount under the earlier legislation. For guidance see CFM52038.

The general rule

The general rule, in S614, deals with what happens where there is a difference between:

  • the tax-adjusted carrying value of an asset or liability at the end of a company period of account, or accounting period (the “earlier period”); and
  • the tax-adjusted carrying value of that asset or liability at the beginning of the immediately following period of account or accounting period (the “later period).

If the change is in accounting policy, the rules will normally apply at the end of a period of account; if it results from a tax rule the rule will normally apply at the end of accounting period.

What is then required is that:

  • a credit or debit must be brought into account for the purposes of Part 5
  • for the later period
  • of an amount equal to the difference
  • in the same way as a credit or debit which is brought into account in determining the company’s profit or loss for that period in accordance with generally accepted accounting practice.

This does not apply, however, to the extent that a credit or debit is brought into account for tax as result of some other provision. In particular see CFM52038 for the spreading of transitional adjustments arising from the changes introduced by F(2)A15.

Position where the company is no longer a party to the derivative contract when the accounting basis changes

S615 applies the same approach where there is a change in accounting bases in a case where a company is not a party to a derivative contract, but amounts are nonetheless brought into account for tax through the application of s607A, see CFMWWWWW.

The wording is different, referring to “the amount outstanding in respect of the derivative contract”, to reflect the fact that the company is not actually a party to the contract in the company period of account in question.

Regulatory power

S598 provides a general power to make regulations about amounts to be recognised in respect of tax in respect of derivative contracts including the effects of a change in changes in accounting basis. Such regulations include the Loan Relationships and Derivative Contracts (Change of Accounting Practice) Regulations 2004, SI2004/3271 and amendments have been made to those regulations by SI2016/1274. See CFM76060. As they mainly dealt with changes effective from 1 January 2005 (including a 10-year spreading rule) and have been partially repealed, they should have no bearing on period of account beginning on or after 1 January 2016. (See CFM52038 for the spreading of transitional adjustments arising from the changes introduced by F(2)A15.)

Company periods of account beginning before 1 January 2016

CTA09/S613 - 615 (as they stood before amendment by F(2)A15) contains provisions to ensure that amounts relating to derivative contracts do not drop out of account when a company changes its accounting policy. These largely mirror the loan relationships provisions at CTA09/S315 - 318.

The rule applies in particular where a company adopts IFRS for the first time. But it is not confined to this instance - it will apply whenever a company changes its accounting policy between the end of one period of account and the start of the next.

In many cases, the change of accounting policy will give rise to a prior period adjustment which (in so far as it relates to derivative contracts) will be taxable under CTA09/S597(2) (see CFM51040). CTA09/S614 deals specifically with those cases where there is an increase or decrease in the value of a derivative contract between the end of one period of account and the beginning of the next, without any credit or debit being brought into account.

There is more detailed guidance on the loan relationships and derivative contracts provisions about changes of accounting policy at CFM76000. Although this is presented in terms of first-time adoption of IFRS, it applies to changes of accounting policy generally.