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HMRC internal manual

Corporate Finance Manual

Old rules: derivative contracts: overview FA 2004 changes

FA 2004 changes - abolition of authorised accounting methods

This guidance applies to periods of account beginning before 1 January 2005 

Substantial changes to the derivative contracts rules were made either by FA 2004 or by Regulations laid in 2004 and 2005. Many of these changes were necessitated by companies being permitted to follow International Accounting Standards (IAS) in preparing their accounts for periods beginning on or after 1 January 2005, and the publication of UK standards for the presentation and disclosure of financial instruments (FRS 25) and their measurement (FRS 26) which replicate the relevant IAS provisions in UK GAAP.

FA04/S50 ensured that accounts prepared in accordance with IAS are as acceptable for tax purposes as those that use UK GAAP. FA04/S52 and FA04/SCH10 brought in detailed changes to FA02/SCH26, as well as to the loan relationships and intangibles legislation.

The most far-reaching of these changes was the abolition of authorised accounting methods (see CFM84000+). Because IAS 39, and FRS 26, introduced for the first time a measurement standard for derivative financial instruments, it was no longer necessary to ‘authorise’ particular accounting methods for tax purposes. Instead, FA02/SCH26/PARA17A (now CTA09/PT7/CH3) laid down the general rule that the amounts to be brought into account in determining a company’s profits or losses on its derivative contracts are those recognised in accounts prepared in accordance with GAAP.

Transitional adjustments frequently arise in companies’ accounts when they first use IAS or FRS 25 and 26, in some cases leading to large one-off profits or losses. Recognition of transitional profits or losses for tax purposes is deferred until the first accounting period beginning on or after 1 January 2006.