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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Accounting for corporate finance: derivative contracts: accounting for derivatives under Old UK GAAP

This guidance applies for Old UK GAAP (excluding FRS 26).

Historic cost accounting for derivatives

Prior to the introduction of New UK GAAP, the great majority of UK companies used the historic cost model for accounting for financial instruments. Under this model, derivatives were recorded at their historic cost, although this was subject to the familiar ‘lower of cost or net realisable value’ principle.

In practice this often meant that derivatives were recognised at their historic cost of nil, and hence the term sometimes applied, that they were ‘off balance sheet’.

For contracts such as interest rate swaps, the holders of such instruments would accrue the periodic cashflows due under the contract (either an asset or liability - usually as an adjustment to interest income/expense).

For contracts without such periodic payments (e.g. a forward), typically no accounting entries would be made until the transaction under the forward takes place.

Under Old UK GAAP (excluding FRS 26) it is also common in some circumstances to treat a financial instrument and hedging derivative as a “synthetic” single instrument. E.g. a company with floating rate borrowings, and a receive floating/pay fixed interest rate swap used to hedge the loan, may account for the loan as a synthetic fixed rate loan.

For contract rate accounting and the use of foreign currency contracts see the guidance on SSAP 20 at CFM26000+.

If derivatives are being used for speculative purposes, other considerations will apply (see CFM24440). 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 Compliance Accountant.