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HMRC internal manual

General Insurance Manual

Taxation of the investment return: financial instruments: accounting periods beginning before 1 October 2002

The Financial Instruments (FI) legislation in Chapter 2 Part 4 FA 1994 applies to the non-life insurance business of proprietary companies in the same way as to other trading companies. Profits and losses on the financial instruments covered by the legislation - interest rate contracts, currency contracts and, from 1 April 1996, debt contracts, are recognised in accordance with the accounting method employed, namely either mark to market or accruals basis. This means, particularly where mark to market is employed, that the realisation basis (GIM5180) normally applying to those instruments which are assets is overridden. All profits arising from instruments held for the purposes of the insurance business are treated as trading receipts or expenses. This applies to exchange gains and losses arising on currency contracts under Chapter 2 Part 2 FA 1993.

Other derivatives are brought into account on ordinary trade profits principles - see Statement of Practice SP4/02 (which superseded SP14/91).