Section 616 | Disapplication of fair value accounting

(1)This section applies if—

(a)a company is treated as a party to a relevant contract under section 584(2)(a) or 586(2) (“the embedded derivative”),

(b)the embedded derivative is a derivative contract which meets the condition in section 579(1)(a) (contract treated for accounting purposes as derivative),

(c)section 592 (embedded derivatives treated as meeting condition in section 591 etc) does not apply in relation to the embedded derivative, and

(d)regulation 9 of the Disregard Regulations (interest rate contracts) does not apply to the embedded derivative.

(2)If this section applies—

(a)sections 573 and 574 (trading credits and debits to be brought into account under Part 3 and non-trading credits and debits to be brought into account under Part 5) do not apply in relation to the embedded derivative, and

(b)subsection (3) or subsections (4) to (6) apply in relation to the original contract, depending on whether that contract is a hybrid derivative or a contract within section 586(1).

(3)If the original contract is a hybrid derivative, profits and losses are to be calculated for the purposes of this Part as if that contract—

(a)were not one where the rights and liabilities are treated for accounting purposes as divided as mentioned in section 584(1) (hybrid derivatives with embedded derivatives), and

(b)were not one in relation to which a fair value basis of accounting is used.

(4)If the original contract is a contract within section 586(1), profits and losses are to be brought into account for the purposes of the Corporation Tax Acts in relation to that contract as if that contract—

(a)were not one where the rights and liabilities are treated for accounting purposes as divided as mentioned in section 586(1) (other contracts with embedded derivatives), and

(b)were not one in relation to which a fair value basis of accounting is used.

(5)Accordingly, this Part does not apply to the original contract (except for the purposes of this section), but section 46 applies to that contract as if fair value accounting were not generally accepted accounting practice in relation to the company.

(6)Subsections (4) and (5) apply despite section 699(1) (priority of this Part for corporation tax purposes).

(7)In this section—

“the Disregard Regulations” means the Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004 (S.I. 2004/3256), and

“the original contract” means—

(a)the hybrid derivative as a result of which the company falls to be treated under section 584(2) (hybrid derivatives with embedded derivatives) as a party to the embedded derivative, or

(b)the contract within section 586(1) (other contracts with embedded derivatives) as a result of which the company falls to be treated under section 586(2) as a party to the embedded derivative.