Chapter CFM57030

Published date16 April 2016
Record NumberCFM57030
Development of the Disregard Regulations

As explained at CFM57010, companies adopting IFRS, New UK GAAP, or Old UK GAAP (including FRS 26) were previously exposed to two main problems concerning the accounting and tax treatments of hedging arrangements.

The first of these (the ‘cash flow hedge problem’) no longer arises following amendments made by F(No.2)A 2015 because the derivative contracts regime now only brings amounts into account where they are recognised in profit or loss.

There can still be an issue where a company is economically hedged but is unable to use hedge accounting (perhaps because the hedge is not sufficiently effective) or chooses not to designate a hedge, the derivative must be accounted for at fair value through profit and loss. This may create a mismatch between the accounting treatment of the hedging derivative and that of the hedged item. Such a mismatch (the ‘undesignated hedge problem’) would – in the absence of any special tax rules – follow through to the tax treatment.

When companies began to prepare for the adoption of fair value accounting on 1 January 2005, many companies and their advisers were particularly concerned about the second of these problems – the ‘undesignated hedge problem’. The Disregard Regulations, as originally laid in 2004, tackled this problem by ensuring that in defined circumstances, undesignated hedges could (broadly) be taxed as if Old UK GAAP (excluding FRS 26) accounting continued to be used. This applied to currency contracts or commodity or debt contracts hedging forecast transactions (regulations 7 and 8) and to interest rate contracts (regulation 9).

Regulations 7, 8 and 9 also applied to designated cash flow hedges, thus also addressing the first, ‘cash flow hedge problem’. It was recognised from the outset, however, that the computational adjustments required to implement these regulations would be burdensome to companies (such as banks) with scores or hundreds of cash flow hedges. So the original Disregard Regulations incorporated the ability to elect out of regulations 7 and 8, and separately out of regulation 9.

Increasing experience of IAS 39 suggested that for many companies the ‘designated cash flow hedge problem’ was considerably more significant than the ‘undesignated hedge problem’. In particular, HMRC received representations that for banks and other companies with large numbers of interest rate contracts, electing out of regulation 9 would also impose an unacceptable...

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