CFM52033 - Derivative contracts: the matters and computational rules: tax-adjusted carrying value

This guidance applies to company periods of account beginning on or after 1 January 2016.

CFA09/S702

For company periods of account beginning on or after 1 January 2016, s614 calls for an adjustment to be made where the tax-adjusted carrying value of a derivative contract at the end of a company period of account or accounting period differs from that at the beginning of the next. Tax-adjusted carrying value is defined in CTA09/S702.

If for any reason a change occurs during an accounting period, it is to be assumed, for the purposes of computing the tax-adjusted carrying value, that an accounting period ended at the date of the change - S702(6),

The starting point in determining the tax-adjusted carrying value is the carrying value of the asset or liability representing the derivative contract as recognised for accounting purposes. But this is then potentially subject to a list of tax adjustments, as set out in S702(8).

The accounting basis to be applied

The accounting carrying value should include amounts recognised in the account in respect of:

  • accrued amounts,
  • amounts paid or received in advance, or
  • impairment losses (including provisions for bad or doubtful debts).

It is assumed that the accounting policy applied in drawing up the company’s accounts for the period was also applied in previous periods of account. Where the actual account policy used is not GAAP-consistent (and in consequence S599 applies, see CFMZZZZZ , the GAAP-consistent basis is substituted - S599(2).

The tax adjustments

The list of tax adjustments is found at S702(8)(a) to (i).

These reflect cases where, for tax purposes, amounts brought into account in respect of the derivative contracts matters differ from amounts treated as items of profit and loss in a company’s GAAP compliant accounts, see CFM51034.

There are also rules to deal with embedded derivatives, which are not free-standing financial instruments in their own right, to which special rules may apply.

In particular, adjustments may also be needed in respect of:

  • Hybrid derivatives with embedded derivatives (S584)
  • Loan relationships with embedded derivatives (S585) - there are corresponding rules for the host loan relationship in S465B, see CFM33143.
  • Other contracts with embedded derivatives (s586).
  • Amounts not fully recognised for accounting purposes (S599A and 599B)
  • PT7/CH5 (continuity of treatment on transfers within groups or organisations),
  • European cross-border transfers of business and mergers (PT7/CH9, 10).