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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Old rules: derivative contracts: basic rules pre FA 2004: authorised methods

Authorised accounting methods - overview

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

This part of the guidance explains how, for tax purposes, the legislation requires companies to use one of two accounting methods in computing the profits and losses from their derivative contracts.

The legislation is similar to that applying to loan relationships. The guidance on loan relationships is at CFM80100+.

The general rule is that a company must use either accruals or mark to market accounting, which conforms with

  • generally accepted accounting practice, and
  • the specific requirements of the legislation for that particular method.

The rule was changed in FA 2004, when the concept of authorised accounting methods was abolished. Instead, the amounts to be brought into account are simply computed in accordance with generally accepted accounting practice. Guidance on the computation, and bringing into account, of profits and losses on derivative contracts in periods of account beginning on or after 1 January 2005 is given in the main guidance, beginning at CFM51000.

FA02/SCH26/PARA17 sets out two authorised accounting methods - accruals and mark to market (often abbreviated to MTM).

Whichever method is used, it must meet the following conditions in FA02/SCH26/PARA17(2).

  • It is generally accepted accounting practice to use that method in that case (see this section of the guidance from CFM84020 onwards).
  • The method used contains proper provision for allocating payments under a derivative contract or any related transaction (see CFM84160).
  • The method contains proper provision for determining exchange gains and losses (see CFM84230).
  • If it is an accruals method, it does not permit the writing down of the value of the derivative contract except for exchange losses, and bad debts in accordance with authorised arrangements.

If the company’s own accounting practice does not conform to the statutory methods it must make an adjustment in its computation (see CFM84110).