CFM16530 - Transition to IAS: the Change of Accounting Practice Regulations: introduction
Regulations
This guidance describes the treatment of loan relationships
and derivative contracts in accounting periods beginning on or
after 1 January 2005.
The Loan Relationships and Derivative Contracts legislation
allows for regulations to be made to modify the operation of the
rules on a change of accounting basis. The regulation-making powers
are in FA96/S84 and S85B FA96/SCH9 paragraph 19B and FA02/SCH26
paragraph 16(3A) and 17C and FA05 Schedule 4 paragraph 52.
Two main sets of regulations have been made under the
regulation making powers. These are:
- the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004 (SI 2004/3256 amended by SI 2005/2012 and SI 2005/3374) (referred to in this guidance as the Disregard Regulations);
- the Loan Relationships and Derivative Contracts (Change of Accounting Practice) Regulations 2004 (SI 2004/3271 as amended by SI 2004/3347 and SI 2005/3383).
In some areas the Disregard Regulations and the Change of Accounting Practice Regulations interact.
The Disregard Regulations
Where companies adopt IAS, the Disregard Regulations retain for tax purposes the UK GAAP treatment prior to FRS 25 and 26 for certain assets, liabilities and contracts. The Disregard Regulations have effect for periods of account beginning on or after 1 January 2005 and apply in the following circumstances.
- Where a company has a hedge of a net investment of shares, ships or aircraft in a foreign operation, exchange gains and losses on such liabilities are disregarded until the disposal of the hedged item.
- Where a company has a hedge of a forecast transaction or firm commitment by a currency contract, or a commodity or debt contract, fair value changes on the contract are disregarded until the hedged item is recognised for tax or until the company ceases to be party to the contract. See CFM13276+.
- Where a company has a hedge of an interest rate contract by an asset, liability, receipt or expense, fair value changes in the accounts are disregarded and an ‘appropriate accruals basis’ is applied instead. See CFM13288+.
- Where a company holds a convertible or asset-linked security (FA96/S92 or FA96/93) on conversion to IAS, the previous treatment of the loan relationship element continues until the security is disposed of.
A company may elect out of the Disregard Regulations for certain hedges.
The Change of Accounting Practice Regulations
The second set of regulations made under the regulation-making powers are the Change of Accounting Practice Regulations. These modify the normal IAS change of basis rules described in CFM16510+ by providing that certain amounts are:
- deferred until after the first accounting period beginning on or after 1 January 2005, and brought in subsequently, or
- never brought into account.
These are described at CFM16535+ in more detail. The Regulations also deal with the amounts to be taxed in relation to ‘held to maturity’ (HTM) assets. See CFM5209 for details of this part of the regulations.
