A company prepares annual accounts to 31 January. On 28 January
2005, it buys exchange- traded futures contracts over the FT-SE 100
index for £600,000. The contracts are held speculatively (but
not as trading stock), and the company marks them to market in its
accounts. At 31 January 2005, the mark to market value is
£550,000.
On 2 April 2005, the company closes out the futures by
entering into equal and opposite contracts. The value of the
contracts on 2 April is £630,000.
The contracts are “financial futures” to which
TCGA92/S143 applies, and are therefore chargeable assets for the
purposes of FA02/SCH26/PARA4A. Since SI 2005/646, which removed
shares from the list of excluded subject matters, applies to
accounting periods beginning on or after 1 January 2005, the equity
futures are treated as derivative contracts throughout the whole of
the accounting period 1 February 2006 to 31 January 2007.
SI 2005/646 also introduced Para 4A and, since the Order came
into force on 16 March 2005 and cannot have retrospective effect,
it cannot provide for a deemed disposal before that date. So the
futures are treated as having been disposed of for CG purposes on
16 March 2005, but for a consideration of £550,000 –
their accounting value at 31 January 2005.
The £550,000 is treated as a payment received by the
company and hence as disposal consideration under TCGA92/S143(6).
The costs of £600,000 are treated as incidental costs of
disposal. A capital loss of £50,000 therefore arises. (Note
that, had there been a gain, there would be no indexation allowance
– see CG56084). This is treated as arising on 2 April 2005:
the company effectively ceases to be party to the contracts when it
closes them out, although this may not be the legal position.
Under Sch 26, a credit of £80,000 arises – the
value of the contract when it was closed out, less its accounting
value at 1 February 2006. The company cannot set off its capital
loss against this credit.
The facts are as in example 1, except that the company closes
out the contracts on 2 March 2005.
Since the contracts are not held on 16 March 2005, the
amendments to Sch 26 made by SI 2005/646 have no application. The
futures remain chargeable gains assets throughout, and any profit
or loss when they are closed out is dealt with under
TCGA92/S143.
The facts are as in example 1, except that in its accounting
period to 31 January 2005, the company accounts for the contracts
at historic cost. On 1 February 2005, the company adopts FRS 26 for
the first time, and begins to account for the derivatives at fair
value. In its accounts to 31 January 2006, it brings in a debit of
£50,000 as a prior year adjustment, representing the
difference between cost (£600,000) and fair value on 1
February 2005 (£550,000).
As in example 1, the company is deemed to have disposed of
the contract on 16 March 2005. The deemed disposal value is
£600,000, its accounting value on 31 January 2005. Thus
neither a capital gain nor a capital loss arises.
The fair value increase of £80,000 between 1 February
and 2 April is, again, brought in as a derivative contracts credit.
The prior period adjustment gives rise to a debit of £30,000
(FA02/SCH26/PARA17B (1)). This is, however, subject to the
spreading provisions of the Change of Accounting Practice
regulations.
