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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Accounting for corporate finance: derivative contracts: measurement under FRS 13

Measurement under FRS 13

Apart from the BBA SORPs for companies in the financial sector, prior to the introduction of FRS 25 and FRS 26 there was comparatively little literature in UK GAAP dealing with accounting for (i.e. recognising and measuring) derivatives.

Prior to the introduction of FRS 25 and FRS 26, the great majority of UK companies used the historic cost model. Under this model, transactions were recorded at their historic cost, although this was subject to the familiar ‘lower of cost or net realisable value’ principle.

Financial instruments (e.g. deposits, debtors, creditors, loans, debentures and shares) were therefore recorded at historic cost and only revalued in circumstances where a derivative was employed as a hedge to manage risk.

If derivatives are being used for speculative purposes, other considerations will apply (see CFM24130). In general, however, it is likely that the derivatives you will encounter will be used in connection with risk management activities.

As with many other aspects of derivatives, if you are in any doubt you should contact your local HMRC accountant.