The Finance Act 2002, Schedule 26, (Parts 2 and 9) (Amendment) Order 2006

Insertion of paragraphs 2A and 2B of Schedule 26

4.  After paragraph 2 insert—

“Non-financial contracts with embedded derivatives

2A.— (1) This paragraph applies where—

(a) a company is party to a contract (a “non-financial contract”) which is not a loan relationship and to which paragraph 2B does not apply, and

(b) in accordance with generally accepted accounting practice, the company treats rights and liabilities under the contract as divided between—

(i) rights and liabilities under one or more derivatives (“embedded derivatives”), and

(ii) the remaining rights and liabilities (the “non-financial host contract”).

(2) The company is to be treated for the purposes of this Schedule as—

(a) party to a relevant contract (a “non-financial embedded derivative”) whose rights and liabilities consist only of the embedded derivative, or

(b) if there is more than one embedded derivative, party to relevant contracts each of whose rights and liabilities consist only of one of the non-financial embedded derivatives.

(3) Each relevant contract to which the company is treated as party under sub-paragraph (2) is to be treated as an option, a future, or a contract for differences according to whether the rights and liabilities of the embedded derivative would be of that character if contained in a separate contract.

Hybrid derivatives

2B.— (1) This paragraph applies where—

(a) a company is party to a relevant contract which satisfies the conditions in paragraph (b) or (c) of paragraph 3(1) (a “hybrid derivative”),

(b) in accordance with generally accepted accounting practice, the company treats rights and liabilities under the contract as divided between—

(i) rights and liabilities under one or more derivatives (“embedded derivatives”), and

(ii) the remaining rights and liabilities (the “host contract”), and

(c) a contract consisting of only those remaining rights and liabilities would be a relevant contract.

(2) The company is to be treated for the purposes of this Schedule as—

(a) party to a relevant contract whose rights and liabilities consist only of the embedded derivative, or (if there is more than one derivative), party to relevant contracts each of whose rights and liabilities consist only of one of the embedded derivatives, and

(b) party to a relevant contract whose rights and liabilities are those of the host contract.

(3) Each relevant contract to which the company is treated as party under sub-paragraph (2)(a) (a “nested derivative”) or (2)(b) (a “quasi-derivative host contract”) is to be treated as an option, a future, or a contract for differences according to whether the rights and liabilities of the embedded derivative or host contract would be of that character if contained in a separate contract.”.