Changes to derivative contract rules – reminder of time limit for non-large companies.
- Deadline fast approaching for small and medium sized companies to make election
- Some companies may not be grandfathered even though fair valuing has been the policy
- Election should be made if there is any doubt otherwise companies will be taxed on fair value movements
Readers will recall from our newsletter of April 2015 that there are strict time limits to make the election to operate the disregard rules for companies making the transition from old UK GAAP to new UK GAAP and as a result of adopting fair value for the first time (new adopters) for accounting periods commencing on or after 1 January 2015.
For large companies these limits were 6 months from the commencement of the accounting period, or if the company held no derivatives at the end of the last period 6 months from when the first derivative was entered into in order for the disregard to apply to that and subsequent derivatives.
However, the time limit for small and medium sized new adopter companies is 12 months from the end of the first accounting period to which the new accounting policy applies. Thus for those companies with a December year end the deadline is 31st December this year. Any small or medium sized companies should elect without delay as the year end is fast approaching.
Companies eligible to be grandfathered (i.e. those already within the existing regime) are treated as having made the election under the transitional provisions.
Whilst some companies may believe they are grandfathered because of previously having a policy of fair valuing derivatives, if those companies have not actually entered into any derivatives in the past they would still need to make the election before they enter into any derivative contract in order for the disregard rules to be effective for that derivative.
This could apply to for example to a group company where the group as a whole adopted IFRS but the company itself had not in fact held any derivatives, perhaps because it was new or had previously not traded.
It would therefore seem to be good practice that a company which has any doubt whether it is covered by the grandfathering provisions should make the election to apply the disregard without delay.
If you would like to discuss this subject further, please get in touch with your usual CWE contact.