This guidance applies only to contracts held on 16 March
2005 in a period of account beginning on or after 1 January
2005
FA02/SCH26/PARA12(14) defines what is meant by “hedging
relationship” in Sch 26. A company has a hedging relationship
between a relevant contract and an asset (or a liability) if the
contract is designated for accounting purposes as the hedging
instrument in a hedge of the asset or liability.
CFM16266 onwards tells you about hedge
accounting under IAS 39 or FRS 26. Since a hedge must be designated
and documented right at the start, there is unlikely to be
uncertainty as to whether this condition has been met.
Equity derivatives are most likely to be designated as the
hedging instrument in a fair value hedge, but the legislation does
not rule out cash flow hedges. Where the conditions of sub-
paragraphs (2B) or (2D) are met as a result of a hedge being
designated (
CFM13108), gains or losses on the whole
of the derivative, or the designated part of it, fall outside of
Sch 26 – not just those on the effective portion.
Alternatively, the relevant contract may be intended to act
as a hedge, but no hedge is designated. This may be because the
company has not adopted IAS 39 or FRS 26, and no formal hedge
designation is necessary. Or it may be that the company has been
unable to designate a hedge, perhaps because the stringent criteria
for hedge effectiveness have not been met.
There is nevertheless a hedging relationship for Sch 26
purposes where the hedging instrument is intended to act as a hedge
of changes in the fair value of a hedged item, where such changes
are attributable to a particular risk and could affect the profit
or loss of the company. The hedged item must be a recognised asset
or liability of the company (not a firm commitment or forecast
transaction), or part of such asset or liability.
“Liability” in this case includes a
company’s own share capital. However, changes in the fair
value of a company’s ordinary shares will, in most cases, not
affect the company’s profit or loss.
Whether or not a company intends a derivative to act as a
hedge of an asset or liability is a question of fact in any
particular case. Where there is any doubt about the company’s
intention, HMRC staff should take into account all of the
circumstances, as well as any contemporaneous documentation
prepared by the company. The guidance on “hedging
intention” in connection with the Disregard Regulations (
CFM13275) is also relevant for Sch 26
purposes.
CFM13112a gives examples.
