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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 10: capital expenditure

This guidance applies to periods of account starting on or after 1 January 2015 where the company has elected for regulation 7 or 8 to apply. 

Forecast transaction results in capital expenditure

Regulation 10(3A) applies where the forecast transaction or firm commitment results in expenditure that would be deductible in computing the profits of a trade or property business were it not debarred as capital. It sets out a formula that ties the bringing back into account of fair value profits and losses deferred by regulations 7 or 8 to the depreciation recognised in the company’s profit and loss account or income statement.

The amount to be brought into account in an accounting period is given by DA/E x FVP, where

  • DA is the amount of depreciation recognised in the profit and loss account or income statement on the asset acquired as a result of the forecast transaction,
  • E is the total expenditure on the asset, and
  • FVP is the aggregate amount (including any transitional amounts) deferred under regulations 7 or 8.

If there is a disposal of the asset, the remaining balance of the deferred amount is brought back into account in the period in which the disposal takes place.

There is an example at CFM57240.

A disposal of the asset to another company in the same group does not, however, crystallise the remainder of the fair value profit or loss. Regulation 10(3B) provides that in this circumstance, regulation 10(3A) continues to apply to the transferee company. But in applying the formula, ‘FVP’ is taken as meaning the fair value profits and losses of the transferor. The deferred fair value profit or loss continues to be brought into account in the transferee company, in proportion to the rate at which that company depreciates the asset.

If the capital asset acquired is not depreciated - for example, if it is an investment property which the company accounts for at fair value through profit or loss - regulation 10(3) will not apply because there is no expenditure that would, were it not for the disallowance of capital expenditure, be deductible in computing trading or property business profits. Instead, regulation 10(1) applies to bring the deferred amounts into account when a ‘termination event’ occurs.