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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Derivative contracts: bringing amounts into account: non GAAP compliant accounts

Accounts that do not comply with GAAP - examples

Example 1

A company holds an interest rate swap for which it accounts in accordance with FRS 26. At the end of its accounting period to 31 December 2009, the swap represents an asset with a fair value of £50,000. On 1 February 2010, the company goes into liquidation, and in March 2010, the liquidator terminates the contract. A payment of £40,000 is received from the counterparty (representing the fair value of the swap at that time), and is shown in the liquidator’s receipts and payments account. No statutory accounts are prepared for year ended 31 December 2010.

The liquidator’s receipts and payments account is not in accordance with GAAP. Credits and debits are therefore computed for CTA09/Part 7 purposes as if the company had continued to account for the swap in accordance with FRS 26. The company can bring into account a debit of £10,000 representing the decline in fair value during the period.

Example 2

A small company (that uses the FRSSE) buys a three-year interest rate cap from a bank, paying a premium of £250,000. In accounts submitted to HMRC, it shows the entirety of the premium deducted for the year in which it was paid. During the course of an enquiry, it is agreed between HMRC and the company’s accountant that this does not constitute correct accounting, and the premium should be spread over the life of the instrument.

CTA09/S599 provides statutory justification for departing from the submitted accounts and basing the tax computations on correct accounting. Furthermore, S599 provides that

  • if, in a future accounting period, the company draws up accounts that are based to any extent on the ‘incorrect’ accounts,
  • the amounts recognised for the purposes of CTA09/Part 7 are those that would appear in the accounts had correct accounting been used in the earlier period.

Thus the company is entitled to debits in years 2 and 3 for the balance of the premium paid, even if such debits do not appear in the accounts.