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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Derivative contracts: hedging: Regulation 13: commencement and transitional rules applying to Regulation 7A

This guidance applies to certain derivative contracts entered into on or after 1 January 2009

Commencement

The rules in Regulation 7A apply to all derivative contracts entered into on or after 10 March 2009 with no modification.

For relevant derivative contracts entered into on or after 1 January 2009 the rules at Regulation 7A will only apply if the derivative contract still performs the relevant hedging function up to an including 10 March 2009. There are special transitional rules for such contracts.

Transition

Where a relevant derivative contract was:

  1. entered into on or after 1 January 2009, and
  2. still performed the hedging function on 10 March 2009, and
  3. an exchange loss would have arisen on that contract if an accounting period had ended on 9 March 2009

then the special rules will apply.

These rules ensure that the loss that is brought into account is the lower of the following:

  • The exchange loss that would have arisen to the company on the derivative contract had an accounting period ended on 9 March 2009, or
  • The exchange loss that arises on the actual termination of the derivative contract, or if earlier
  • The exchange loss that would have arisen to the company if the contract had been terminated on the last day of the first accounting period ending on or after 10 March 2009.

In order to ensure that, where there is more than one derivative contract hedging the same set of share proceeds, it is not possible to bring into account a loss that is greater than the overall loss that is incurred on the combination of all of the relevant contracts, the total amount that is brought into account under this regulation cannot exceed:

  • the aggregate net exchange loss that would have arisen to the company in relation to all of the contracts hedging the same set of share proceeds had an accounting period ended on 9 March 2009, or
  • the aggregate net exchange loss that arose to the company on the termination of all of the contracts hedging the same set of share proceeds, or, if earlier
  • the aggregate net exchange loss on all of the contracts hedging the same set of share proceeds that would have arisen if all of the contracts had been terminated on the last day of the first accounting period which ends on or after 10 March 2009.

Where the latter provision results in a restriction of the loss brought into account, the loss should be split between any relevant contracts on a just and reasonable basis.

There is an example at CFM57190.