Derivative contracts: bringing amounts into account: GAAP
The importance of GAAP
FA04/S50 amended the definition of ‘generally accepted accounting practice’ (GAAP) for the purposes of the Tax Acts, to take in accounts prepared in accordance with international accounting standards (IAS) as well as those following UK GAAP. This definition replaces that at ICTA88/S836A for accounting periods beginning on or after 1 January 2005. This means that IAS accounts are as acceptable as those prepared under UK GAAP as a basis for computing a company’s tax liability.
A company may therefore, in single entity accounts submitted to HMRC, account for financial instruments (including derivatives)
- under UK GAAP excluding FRS26 and associated standards,
- under FRS 26,
- under IAS 39 (the company may use either the full standard, or the European Community-adopted version), or
- if it is a small company, under the Financial Reporting Statement for Smaller Entities (FRSSE).
All of these accounting practices are acceptable for tax purposes.
The basic rule for computing credits and debits from derivative contracts (CFM51040) applies to companies using the FRSSE, or companies that have not yet adopted FRS 26, as well as to those using FRS 26 or IAS 39.
If a company does not draw up accounts in accordance with GAAP (or if it does not prepare accounts at all), CTA09/S599 provides that the provisions of Part 7 apply as if correct accounts had been drawn up. CFM51080 gives examples.