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HMRC internal manual

Corporate Finance Manual

Old rules: derivative contracts: basic rules pre FA 2004: authorised method or equivalent

Authorised method or equivalent

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

Is or equates to authorised basis

FA02/SCH26/PARA18(3) sets out the rule when a company uses a method in its statutory accounts which is or equates to an authorised accruals method.

If the method used by the company is an authorised one, that is it follows the requirements in FA02/SCH26/PARA17(2) to (4) (CFM84010) in all respects, this is acceptable for tax purposes. No adjustment is needed unless the company is forced by specific legislation to make adjustments.

If the accounting basis equates to an authorised method (see CFM84120) the company will be required to use the authorised method to which it equates in its tax computation.

Neither authorised nor equates to an authorised basis

If the company uses a basis that is neither authorised nor equates to an authorised method then it must use the authorised accruals method for tax purposes unless

  • it elects to use mark to market (MTM) under FA02/SCH26/PARA19, or
  • is required to use mark to market under FA02/SCH26/PARA20 or 21 (FA02/SCH26/PARA17(4)).

An unauthorised method would include one that valued contracts at the lower of cost or net realisable value. This is not

  • an authorised MTM method because fair value is not necessarily used if it exceeds cost
  • an authorised accruals basis because it may value the contract at different times and so does not meet the requirement of FA02/SCH26/PARA17(2)(d).