D1.855 Hedging for tax purposes
Under UK GAAP (excluding FRS 26) as it applied for periods of account beginning before 1 January 2015, where a company entered into a derivative as a hedge, profits and losses on the derivative were generally recognised for tax purposes on an accrual basis, which was the same basis as profits and losses on the item that was being hedged were recognised for tax purposes. When companies began to prepare their accounts in accordance with IFRS, or for accounting periods beginning on or after 1 January 2005 and before 1 January 2015, UK GAAP incorporating FRS 26, they were required to separately recognise derivatives on a fair value basis. The result was that unless profits and losses arising on the hedged item were recognised on a fair value basis for tax purposes it was not possible to achieve tax-effective hedging. To address this provisions have been introduced by the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004 (Disregard Regulations) to permit companies to hedge using derivative contracts in a tax-efficient way.
Where a company which has been preparing its accounts in accordance with UK GAAP (excluding FRS 26) begins to prepare its accounts in accordance with IFRS, or new UK GAAP and it adopts either FRS 101 or FRS 102, in all cases it will be required to account for its derivative contracts on a fair value basis and thus the Disregard Regulations will also be relevant for
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