Readers will recall our newsbrief last August on the topic of proposed changes to the Derivative contracts rules, requiring companies to make an election to benefit from the Disregard rules in 2015 and subsequent years.
Those rules have now been enacted as The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses)(Amendment) Regulations 2014.
For companies adopting fair value accounting in relation to derivative contracts for the first time (“new adopters” in the terms of the Regulations) the period in which this occurs is called the “first relevant period”.
In this case the election to opt in must be made by the date which is six months after the start of the first relevant period for qualifying companies (i.e. those which are within the Senior Accounting Officer rules) or 12 months after the end of the first relevant period for others.
Thus for new adopters with a December 31 year end the first relevant period will be the year ended December 31 2015 and the election will be required to be made by June 30 2015 if large or by December 31 2016 if not.
There is however another category of election that is required to be made by companies that already prepare accounts which would require fair valuing derivative contracts, but who have not actually entered into any such contracts to date i.e. companies which are not new adopters .
In this case these companies are not covered by the grandfathering provisions but need to separately make an election for the Disregard rules to apply. In the absence of such an election they will be taxed on the fair value gains and losses arising on derivative contracts.
For these companies the election needs to be made in advance of the derivative contract being entered into. Thus it is important to identify this time limit, as if such an election is not made before any such contract is entered into, the Disregard rules cannot apply to the fair value gains and losses on that contract (or any other entered into before the election is made).
Consequently such companies may wish to make an election now to ensure that when they do enter into a derivative contract they will be able to benefit from the Disregard rules and not be required to be taxed on the fair value movements on such contracts.
CW Energy LLP
April 2015