Commentary

D1.861 Interest rate contracts

Corporate tax
Corporate tax | Commentary

D1.861 Interest rate contracts

Corporate tax | Commentary

D1.861 Interest rate contracts

This provision applies where a company uses all or part of an interest rate contract in order to hedge an underlying transaction. An interest rate contract is defined as:

  1.  

    (a)     a derivative contract whose underlying subject matter is, or includes, interest rates. It will thus be noted that the definition goes far wider than what would generally be considered to be an interest rate contract, such as an interest rate swap, forward rate agreement or an interest rate future; or

  2.  

    (b)     in a case not falling within head (a) above, a swap contract in which payment falls to be made by reference to a rate of interest or to an index determined by reference to income or retail prices1.

Where this provision applies, credits and debits representing the whole or part of the fair value profit or loss arising to the company in respect of the interest rate contract for an accounting period are left out of account in computing its profit or loss for the purposes of the derivative contracts legislation provided:

  1.  

    (i)     there is a hedging relationship between the contract or a portion of the contract and any of the risks arising in respect of an asset, liability, receipt or expense (the hedged item); and

  2.  

    (ii)     the fair value profits or losses arising on the hedged item or in relation to any of the risks, in relation to which the contract was intended to act as a hedge2 arising in respect of the hedged item,

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