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Meaning of “derivative contract” and other basic definitions |
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576 | “Derivative contract” |
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(1) | For the purposes of this Part, a contract of a company is a derivative contract |
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of the company for an accounting period if it— |
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(a) | is a relevant contract (see sections 577 and 578), |
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(b) | meets any of the accounting conditions for the accounting period (see |
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(c) | is not prevented from being a derivative contract by section 589 |
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(contracts excluded because of underlying subject matter: general) or |
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any other provision of the Corporation Tax Acts. |
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(2) | See also sections 587 and 588 (other contracts etc treated as derivative |
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(3) | But note section 701 which includes power to amend the provisions of this |
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Chapter relating to the meaning of “derivative contract”. |
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(1) | In this Part “relevant contract” means— |
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(c) | a contract for differences. |
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(2) | For the meaning of “option”, “future” and “contract for differences”, see |
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578 | Relevant contracts of a company and being party to such contracts |
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(1) | For the purposes of this Part, references to a relevant contract of a company are |
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references to a relevant contract entered into or acquired by the company (but |
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(2) | For the purposes of this Part, a relevant contract is acquired by a company if |
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(a) | entitled to the rights under the relevant contract, and |
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(b) | subject to the liabilities under it. |
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(3) | For particular cases where companies are treated as parties to relevant |
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(a) | section 584 (hybrid derivatives with embedded derivatives), |
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(b) | section 585 (loan relationships with embedded derivatives), and |
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(c) | section 586 (other contracts with embedded derivatives). |
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(4) | References in this Part to a company being a party to a relevant contract are to |
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be read in accordance with this section. |
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579 | The accounting conditions |
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(1) | The accounting conditions for any accounting period are that— |
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(a) | the relevant contract is treated for accounting purposes as a derivative, |
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(b) | the relevant contract— |
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(i) | is not so treated just because of not meeting the requirement in |
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paragraph 9(b) of Financial Reporting Standard 26 issued in |
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December 2004 by the Accounting Standards Board |
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(requirement for no initial net investment or smaller initial net |
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investment than comparable types of contract), but |
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(ii) | is or forms part of a financial asset or liability for accounting |
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(c) | the relevant contract is not within paragraph (a) or (b), but is within |
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(2) | A relevant contract is within this subsection if— |
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(a) | its underlying subject matter is commodities, or |
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(b) | it is a contract for differences whose underlying subject matter is— |
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(ii) | tangible movable property, other than commodities which are |
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(iii) | intangible fixed assets, |
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(iv) | weather conditions, or |
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(3) | For the purposes of subsection (1)(a), a relevant contract of a company is |
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treated for accounting purposes as a derivative for an accounting period if for |
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(a) | it is so treated for the purposes of the relevant accounting standard |
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used by the company for that period, or |
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(b) | it would be so treated if the company used the relevant accounting |
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standard for that period in respect of the contract. |
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(4) | For the purposes of subsection (1)(b), a relevant contract of a company is or |
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forms part of a financial asset or liability for accounting purposes for an |
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accounting period if for that period— |
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(a) | it is or does so for the purposes of the relevant accounting standard |
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used by the company for that period, or |
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(b) | it would be or would do so if the company used the relevant accounting |
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standard for that period in respect of the contract. |
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(5) | In this section “relevant accounting standard” means— |
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(a) | for any accounting period in relation to which it is required or |
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permitted to be used, Financial Reporting Standard 25 issued in |
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December 2004 by the Accounting Standards Board, as from time to |
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time modified, amended or revised, or |
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(b) | for any accounting period in relation to which it is required or |
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permitted to be used, any subsequent accounting standard dealing |
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with transactions which are derivatives, as from time to time modified, |
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(6) | For the meaning of “underlying subject matter”, see section 583. |
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(1) | In this Part “option” includes a warrant. |
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(2) | References in this Part to an option do not include a contract whose terms— |
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(i) | that, after setting off their obligations to each other under the |
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contract, a cash payment is to be made by one party to the other |
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in respect of the excess, if any, or |
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(ii) | that each party is liable to make to the other party a cash |
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payment in respect of all that party’s obligations to the other |
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(b) | do not provide for the delivery of any property. |
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(3) | Subsection (2) does not prevent an option whose underlying subject matter is |
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currency from being an option. |
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(a) | section 652 (introduction to sections 653 to 655), |
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(b) | section 665 (issuers of securities with embedded derivatives: equity |
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(c) | section 695 (transfers of value to connected companies), |
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| in which “option” is to be construed as if subsections (2) and (3) were omitted. |
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(1) | In this Part “future” means a contract for the sale of property under which |
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(a) | at a future date agreed when the contract is made, and |
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(b) | at a price so agreed, |
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| but this is subject to subsection (3). |
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(2) | For the purposes of subsection (1)(b), a price is agreed when the contract is |
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(a) | the price is left to be determined by reference to the price at which a |
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contract is to be entered into on a market or exchange or could be |
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entered into at a time and place specified in the contract, or |
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(b) | in a case where the contract is expressed to be by reference to a standard |
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lot and quality, provision is made for a variation in the price to take |
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account of any variation in quantity or quality on delivery. |
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(3) | References in this Part to a future do not include a contract whose terms— |
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(i) | that, after setting off their obligations to each other under the |
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contract, a cash payment is to be made by one party to the other |
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in respect of the excess, if any, or |
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(ii) | that each party is liable to make to the other party a cash |
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payment in respect of all that party’s obligations to the other |
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(b) | do not provide for the delivery of any property. |
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(4) | Subsection (3) does not prevent a future whose underlying subject matter is |
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currency from being a future. |
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582 | “Contract for differences” |
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(1) | In this Part “contract for differences” means a contract the purpose or |
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pretended purpose of which is to make a profit or avoid a loss by reference to |
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(a) | the value or price of property described in the contract, or |
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(b) | an index or other factor designated in the contract. |
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(2) | But none of the following is a contract for differences— |
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(c) | a contract of insurance, |
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(d) | a capital redemption policy, |
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(e) | a contract of indemnity, |
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(3) | For the purposes of subsection (1)(b), an index or factor may be determined by |
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583 | “Underlying subject matter” |
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(1) | In this Part references to the underlying subject matter of a relevant contract are |
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(2) | The underlying subject matter of an option is— |
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(a) | the property which would fall to be delivered if the option were |
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(b) | if the property which would so fall is a derivative contract, the |
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underlying subject matter of that contract. |
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(3) | The underlying subject matter of a future is— |
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(a) | the property which, if the future were to run to delivery, would fall to |
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be delivered at the date and price agreed when the contract is made, or |
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(b) | if the property which would so fall is a derivative contract, the |
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underlying subject matter of that contract. |
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(4) | The underlying subject matter of a contract for differences is— |
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(a) | if the contract for differences relates to fluctuations in the value or price |
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of property described in the contract, the property so described, or |
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(b) | if an index or factor is designated in the contract for differences, the |
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matter by reference to which the index or factor is determined. |
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(5) | The things which may be the subject matter of a contract for differences |
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(b) | weather conditions, and |
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(6) | Interest rates are not the underlying subject matter of a relevant contract if— |
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(a) | under the terms of that contract— |
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(i) | the date on which a party to that contract becomes subject to a |
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duty to make a payment is a variable date, and |
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(ii) | the amount of that payment varies according to the date of |
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(b) | those terms refer to an interest rate only for the purpose of establishing |
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(7) | The underlying subject matter of a relevant contract is not treated as being— |
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(b) | shares in a company, or |
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(c) | rights of a unit holder under a unit trust scheme, |
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| just because its underlying subject matter includes income from that kind of |
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Cases where companies treated as parties to relevant contracts |
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584 | Hybrid derivatives with embedded derivatives |
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(1) | This section applies if— |
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(a) | a company is a party to a relevant contract which meets the condition |
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in section 579(1)(b) or (c) (contracts not treated for accounting purposes |
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(b) | in accordance with generally accepted accounting practice, the |
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company treats the rights and liabilities under the contract as divided |
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(i) | rights and liabilities under one or more derivatives (“embedded |
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(ii) | the remaining rights and liabilities, and |
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(c) | a contract consisting of only those remaining rights and liabilities |
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would be a relevant contract. |
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(2) | The company is treated for the purposes of this Part— |
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(a) | as a party to a relevant contract whose rights and liabilities consist only |
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of those of the embedded derivative, or (if there is more than one |
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embedded derivative) as a party to relevant contracts each of whose |
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rights and liabilities consist only of those of one of the embedded |
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(b) | as a party to a relevant contract whose rights and liabilities are those |
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within subsection (1)(b)(ii). |
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(3) | Each relevant contract to which a company is treated as a party under |
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subsection (2) is treated for the purposes of this Part as an option, a future or a |
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contract for differences depending on what the character of a separate contract |
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containing the rights and liabilities of the deemed relevant contract would be. |
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(4) | In this Part “hybrid derivative” means a relevant contract within subsection |
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(a) | section 592 (embedded derivatives treated as meeting condition in |
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(b) | section 616 (disapplication of fair value accounting for certain |
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585 | Loan relationships with embedded derivatives |
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(1) | This section applies if in accordance with generally accepted accounting |
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practice a company treats the rights and liabilities under a loan relationship to |
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which it is a party as divided between— |
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(a) | rights and liabilities under a loan relationship, and |
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(b) | rights and liabilities under one or more derivative financial |
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instruments or equity instruments (“embedded derivatives”). |
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(2) | The company is treated for the purposes of this Part— |
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(a) | as a party to a relevant contract whose rights and liabilities consist only |
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of those of the embedded derivative, or |
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(b) | if there is more than one embedded derivative, as a party to relevant |
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contracts each of whose rights and liabilities consist only of those of one |
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of the embedded derivatives. |
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(3) | Each relevant contract to which a company is treated as a party under |
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subsection (2) is treated for the purposes of this Part as an option, a future or a |
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contract for differences depending on what the character of a separate contract |
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containing the rights and liabilities of the embedded derivative would be. |
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(4) | For the corresponding treatment of the rights and liabilities within subsection |
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(1)(a), see section 415 (loan relationships with embedded derivatives). |
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(a) | section 416 (election for section 415 and this section to apply), and |
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(b) | section 635 (some creditor relationships treated as ones in relation to |
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which section 415 and this section have effect). |
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586 | Other contracts with embedded derivatives |
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(1) | This section applies if a company— |
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(a) | is a party to a contract which is neither a hybrid derivative nor a loan |
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(b) | in accordance with generally accepted accounting practice, treats the |
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rights and liabilities under the contract as divided between— |
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(i) | rights and liabilities under one or more derivatives (“embedded |
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(ii) | the remaining rights and liabilities. |
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(2) | The company is treated for the purposes of this Part— |
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(a) | as a party to a relevant contract whose rights and liabilities consist only |
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of those of the embedded derivative, or |
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(b) | if there is more than one embedded derivative, as a party to relevant |
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contracts each of whose rights and liabilities consist only of those of one |
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of the embedded derivatives. |
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(3) | Each relevant contract to which a company is treated as a party under |
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subsection (2) is treated for the purposes of this Part as an option, a future or a |
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contract for differences depending on what the character of a separate contract |
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containing the rights and liabilities of the embedded derivative would be. |
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(4) | See also section 616 (disapplication of fair value accounting for certain |
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Other contracts etc treated as derivative contracts |
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587 | Contract relating to holding in OEIC, unit trust or offshore fund |
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(1) | This section applies in relation to a relevant contract to which a company is a |
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party in an accounting period if— |
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(a) | it is not a derivative contract for the purposes of this Part but for this |
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(b) | its underlying subject matter consists wholly or partly of a relevant |
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(2) | This Part has effect— |
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(a) | for that accounting period, and |
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(b) | for any succeeding accounting period in which the relevant contract is |
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a relevant contract of the company, |
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| as if the relevant contract were a derivative contract. |
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(3) | For the purposes of this section, the underlying subject matter of a contract |
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consists wholly or partly of a relevant holding in an accounting period if— |
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(a) | at any time in that period it consists wholly or partly of— |
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(i) | any shares in an open-ended investment company, |
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(ii) | any rights under a unit trust scheme, or |
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(iii) | a material interest in an offshore fund within the meaning of |
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Chapter 3 of Part 6 (see section 489), and |
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(b) | there is a time in the period when that company, scheme or fund fails |
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to meet the qualifying investments test. |
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(4) | In subsection (3) “meeting the qualifying investments test” has the same |
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meaning as in section 493 (the qualifying investments test). |
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(5) | See section 18(2)(c)(ii) of F(No.2)A 2005 (section 17(3): specific powers) for the |
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power to modify the meaning of “relevant holding” for the purposes of this |
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section by regulations under section 17(3) of that Act (regulations about |
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authorised unit trusts and OEICs). |
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(6) | For the way in which credits and debits are to be brought into account where |
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this section applies, see section 601 (application of fair value accounting). |
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(a) | section 602 (contract becoming one relating to holding in OEIC, unit |
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trust or offshore fund), and |
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(b) | section 660 (company ceasing to be party to contract relating to holding |
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in OEIC, unit trust or offshore fund). |
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588 | Associated transaction treated as derivative contract |
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(1) | This section is to be read as if it were in Chapter 7 (shares with guaranteed |
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returns etc) of Part 6 (relationships treated as loan relationships etc). |
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section 526(2) (meaning of “non-qualifying share”), and |
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section 532 (meaning of “associated transaction” and “the associated |
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transactions condition”). |
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(3) | Subsection (4) applies in a case which falls within section 523(1)(b)(ii) (loan |
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relationships: non-qualifying shares) because the share mentioned in section |
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523(1)(a) is a non-qualifying share as a result of the associated transactions |
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(4) | An associated transaction is treated for the purposes of this Part as a derivative |
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contract or a transaction in respect of a derivative contract if it is not in fact such |
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a contract or transaction. |
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