CFM37720 | Loan relationships: 'hybrid' securities with embedded derivatives: electing for bifurcation

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This guidance is only relevant to companies applying UK GAAP as it applied before 1 January 2005 which is not possible for periods of account beginning on or after 1 January 2016.

CTA09/416 - elections for CTA09/S415 to apply

A company that continued to account under ‘old UK GAAP’ could nevertheless elect under CTA09/S416 for its ‘relevant assets’ to be treated as a host contract plus a relevant contract. ‘Relevant assets’ are those that would, or could, be bifurcated if the company had adopted IFRS or ‘new UK GAAP’. Elections will therefore apply to all of the convertible or asset-linked securities that the company holds (creditor relationships) - but not to securities that it has issued (debtor relationships).

The election - which is irrevocable - can only be made by a company that, at the start of its first period of account beginning on or after 1 January 2005, does not hold any ‘relevant assets’. It must be made within 90 days of the company first acquiring a ‘relevant asset’, and has effect from the beginning of the period of account in which that asset is acquired.

An election permits the company to bring profits (or losses) referable to the ‘equity aspect’ of a security into account as chargeable gains (see CFM55200+). However, a company that makes an election will also have to bring into account credits on the host contract, representing the difference between the value at which it is initially recognised and the redemption value.

Any election made on or after 12 March 2008 did not, however, have any effect on certain related-party assets to which CTA09/S418 applied, see CFM37730. That provision, in turn, was repealed with effect for loan relationships to which a company was a party on or after 19 July 2011 and superseded by the group mismatch schemes provisions in CTA10/PT21B.