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HMRC internal manual

Corporate Finance Manual

Old rules: derivative contracts: basic rules pre FA 2004: equates to authorised basis

‘Equates to an authorised basis’

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

FA02/SCH26/PARA18(5) and (6) explain what is meant by ‘equates to’.

Equates to accruals

Any accounting method that allocates payments to accounting periods when they accrue equates to an authorised accruals basis (FA02/SCH26/PARA18(5)(a)). For example, a company may follow an authorised accruals basis but not make arrangements for bad debts which conform to the requirements of FA02/SCH26/PARA22 - it may make a general provision. But its method will equate to an authorised accruals basis because it uses the allocation method.

Equates to mark to market

Where a company accrues payments under a derivative contract, but

  • brings in a fair value of the derivative contracts excluding those payments
  • the credits and debits produced correspond to the amounts that would be brought in under mark to market

then the accounting method equates to an authorised mark to market basis (FA02/SCH26/PARA18(6)). This is also called the ‘clean’ mark to market basis.

Otherwise, any method that brings in amounts that represent fair value and allocates payments to the accounting period in which they become due and payable, equates to mark to market.