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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Derivative contracts: accounting conditions: main accounting requirement

The main accounting condition

The basic rule in CTA09/S579(1)(a) is that if accountancy practice treats a particular option, future or contract for differences (CFD) as a derivative for accounting purposes, 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.

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

  • it is treated as such by 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.

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 FRS 26 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.

Some companies will not follow FRS 25. Examples are

  • small companies, which follow the Financial Reporting Standard for Smaller Entities (FRSSE)
  • companies that use UK GAAP excluding FRS 26 and associated standards
  • companies which have adopted International Accounting Standards, and therefore use IAS 32 and IAS 39, rather than FRS 25 and FRS 26
  • 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, CTA09/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 and FRS 26 define derivative in the same way, a contract that is a derivative within IAS 39 will satisfy the accounting test.

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

There is an alternative accounting test for contracts not treated as derivative financial instruments but treated as financial assets for accounting purposes (see CFM50280).

Where neither of these two accountancy tests is satisfied a contract may still be a derivative contract by virtue of S579 if its underlying subject matter is commodities or it is one of a specified type of contract for differences (see CFM50240 - 50270).