HMRC internal manual

Corporate Finance Manual

CFM51070 - Derivative contracts: the matters and computational rules: GAAP

CTA10/S1127

The importance of GAAP

Both before and after the changes made by F(2)A15 the general rule in s595(2) is that the amounts to be brought into account in any period in respect of the derivative contracts ‘matters’ are ‘those recognised in determining the company’s profit or loss for the period in accordance with generally accepted accounting practice (GAAP).

S597 sets out what is meant by ‘those recognised in determining the company’s profit or loss; after the amendments, applicable in company periods of account beginning on or after 1 January 2016, the requirement is that the amount is recognised as ‘an item of profit or loss’; before amendment the amount had to be recognised in one of the statements set out in s597(1) as it stood before amendment.

In either case the accounts in question have to be prepared in accordance with GAAP, and if they are not, amounts must be computed as if GAAP-compliant accounts had been prepared - S599(1), see CFM51080.

Generally accepted accounting practice (GAAP) is defined in CTA10/S1127 as UK GAAP. Where a company prepares IAS accounts UK GAAP will mean GAAP in relation to IAS accounts. IAS accounts are accounts prepared in accordance with International Accounting Standards, and a standard may be applied in its current form at any particular time, or as adopted by the EU. (More recent international standards are entitled, International Financial Reporting Standards or IFRS, but these fall within the ambit of the statutory definition of IAS). There is general guidance about the meaning of GAAP, in the context of the determination of trading profits, beginning at BIM31000 and in the context of financial instruments at CFM20000.

Accounting standards may change with time and this may impact amounts taken into account for tax. From 1 January 2016, UK GAAP will normally mean IAS if applied in the financial statements, otherwise FRS102 or, in the case of micro entities, FRS105.

For earlier periods, in particular before FRS 102 and FRS105 came into effect, GAAP-compliant accounts might have been prepared (and derivative contracts accounted for) in accordance with the following standards:

  • under UK GAAP excluding FRS26 and associated standards,
  • under UK GAAP, with adoption of 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, so long as permissible in the period of account in question under accounting standards then applicable.