CFM50220 - Derivative contracts: accounting conditions: main accounting requirement

CTA09/S579(1)(a)

The main accounting condition

The definition of a derivative contract requires that it is a relevant contract, meets the accounting conditions and does not have excluded underlying subject matter.

The first leg of the accounting conditions is that if accountancy practice treats a particular relevant contract as a derivative for accounting purposes, then it will satisfy the accounting conditions. This will meant that we will also treat it as a derivative contract for tax purposes, except in the minority of cases where it is excluded because of its underlying subject matter.

Reference to relevant accounting standards

A contract is treated for accounting purposes as a derivative if either

  • it is treated as such by (now superseded) Financial Reporting Standard 25, or
  • it is treated as such by any replacement accounting standard, which the company is required or permitted to use for the accounting period in question.

FRS25

FRS 25 uses the term ‘derivative’, which is stated to have the meaning specified in FRS 26. An instrument that is a derivative as defined in FRS26 will pass the S579(1)(a) accounting test (see CFM50230). It is not necessary for the company to show that the particular contract has a discernable impact on the disclosures made within the accounts.

FRS102

FRS 25/26 have been withdrawn, for periods begining on or after 1 January 2015, and has been replaced by FRS102. This standard made significant changes to the UK accounting landscape for larger companies and groups.

However, the definition of a derivative contract under FRS102 is similar to the definition in FRS25/26

Companies not applying a relevant accounting standard

Some companies will not follow FRS25/26 or its replacement FRS102. Examples are:

  • Micro-entities that choose to adopt FRS105 and, before 2015, small companies which followed the Financial Reporting Standard for Smaller Entities (FRSSE)
  • companies that before 2015 used UK GAAP excluding FRS 26 and associated standards
  • companies which have adopted International Accounting Standards or FRS101, and therefore use IAS 32/IAS 39 or IAS32/IFRS9, rather than FRS 25/FRS 26 or FRS102
  • companies which are not incorporated in the UK and therefore may prepare accounts in accordance with the accounting standards that apply in their country of incorporation.

However, S579(3)(b) says that, in such cases, we imagine that the company does apply the relevant accounting standard. If the contract would be treated as a derivative in this deemed scenario, then it passes the accounting test. In particular, since IAS 39, IFRS9, FRS 26 and FRS102 all define derivative in essentially the same way, a contract that is a derivative within one of those standards will satisfy the accounting test.

The definition of derivative financial instrument is discussed further at CFM50230.

Further guidance

There are two further ways which a relevant contract can satisfy the accounting conditions:

  • The second alternative (certain financial assets and liabilities where the initial investment not small) is discussed further at CFM50280).
  • The third alternative (deemed satisfaction of the accounting condition) is discussed further at CFM50240 - 50270).