Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
, see all updates

Loan relationships: 'hybrid' securities with embedded derivatives: electing for bifurcation

Elections for CTA09/S415 to apply

A company that continues to account under ‘old UK GAAP’ may nevertheless elect under CTA09/S416 for its ‘relevant assets’ to be treated as a host contract plus a relevant contract. ‘Relevant assets’ are those that would, or could, be bifurcated if the company had adopted IFRS or ‘new UK GAAP’. Elections will therefore apply to all of the convertible or asset-linked securities that the company holds - but not to securities that it has issued.

The election - which is irrevocable - can only be made by a company that, at the start of its first period of account beginning on or after 1 January 2005, does not hold any ‘relevant assets’. It must be made within 90 days of the company first acquiring a ‘relevant asset’, and has effect from the beginning of the period of account in which that asset is acquired. The company is treated as having changed its accounting policy on that date, with CTA09/S316 applying, so ‘transitional’ credits or debits are brought into account.

An election permits the company to bring profits (or losses) referable to the ‘equity aspect’ of a security into account as chargeable gains (see CFM55200+). However, a company that makes an election will also have to bring into account credits on the host contract, representing the difference between the value at which it is initially recognised and the redemption value.

Any election made on or after 12 March 2008 does not, however, have any effect on assets to which CTA09/S418 applies, see CFM37730.