Commentary

D1.856 Currency contracts used to hedge a forecast transaction or a firm commitment

Corporate tax
Corporate tax | Commentary

D1.856 Currency contracts used to hedge a forecast transaction or a firm commitment

Corporate tax | Commentary

D1.856 Currency contracts used to hedge a forecast transaction or a firm commitment

In certain cases where a company enters into a derivative contract whose underlying subject matter consists wholly of currency (currency contract) to hedge a forecast transaction or a firm commitment, any fair value profits or losses arising on the currency contract will be ignored for the purposes of the derivative contracts legislation in the accounting period in which they are reflected in the company's accounts. Instead, very broadly, any profits or losses arising in respect of the currency contract and any transitional adjustments arising in respect of that contract1 will be recognised for tax purposes on the same basis as profits and losses arising in respect of the hedged item are reflected in the company's accounts, or if earlier when the company ceases to be a party to the derivative contract2. This is considered further at D1.860.

Where only part of a currency contract is used as a hedge, the Disregard Regulations3 applies to the fair value profits and losses and any transitional adjustments arising on that portion of the contract4. If the underlying subject matter of the contract does not consist wholly of foreign currency and the other subject matter of the contract also includes interest rates, the contract may qualify for tax hedging treatment under reg 9 (see D1.861).

In order for reg 7 to apply:

  1.  

    (a)     there must be a hedging relationship between the contract or part of the contract and the forecast transaction or firm

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