Part 7Derivative contracts

Chapter 2Contracts to which this Part applies

Cases where companies treated as parties to relevant contracts

584Hybrid derivatives with embedded derivatives

1

This section applies if—

a

a company is a party to a relevant contract which meets the condition in section 579(1)(b) or (c) (contracts not treated for accounting purposes as derivatives),

b

in accordance with generally accepted accounting practice, the company treats the 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, and

c

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

2

The company is treated for the purposes of this Part—

a

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

b

as a party to a relevant contract whose rights and liabilities are those within subsection (1)(b)(ii).

3

Each relevant contract to which a company is treated as a party under subsection (2) is treated for the purposes of this Part as an option, a future or a contract for differences depending on what the character of a separate contract containing the rights and liabilities of the deemed relevant contract would be.

4

In this Part “hybrid derivative” means a relevant contract within subsection (1)(a).

5

See also—

a

section 592 (embedded derivatives treated as meeting condition in section 591 etc), and

b

section 616 (disapplication of fair value accounting for certain embedded derivatives).

585Loan relationships with embedded derivatives

1

This section applies if in accordance with generally accepted accounting practice a company treats the rights and liabilities under a loan relationship to which it is a party as divided between—

a

rights and liabilities under a loan relationship, and

b

rights and liabilities under one or more derivative financial instruments or equity instruments (“embedded derivatives”).

2

The company is treated for the purposes of this Part—

a

as a party to a relevant contract whose rights and liabilities consist only of those of the embedded derivative, or

b

if there is more than one embedded derivative, as a party to relevant contracts each of whose rights and liabilities consist only of those of one of the embedded derivatives.

3

Each relevant contract to which a company is treated as a party under subsection (2) is treated for the purposes of this Part as an option, a future or a contract for differences depending on what the character of a separate contract containing the rights and liabilities of the embedded derivative would be.

4

For the corresponding treatment of the rights and liabilities within subsection (1)(a), see section 415 (loan relationships with embedded derivatives).

5

See also—

a

section 416 (election for section 415 and this section to apply), and

b

section 635 (some creditor relationships treated as ones in relation to which section 415 and this section have effect).

586Other contracts with embedded derivatives

1

This section applies if a company—

a

is a party to a contract which is neither a hybrid derivative nor a loan relationship, and

b

in accordance with generally accepted accounting practice, treats the 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.

2

The company is treated for the purposes of this Part—

a

as a party to a relevant contract whose rights and liabilities consist only of those of the embedded derivative, or

b

if there is more than one embedded derivative, as a party to relevant contracts each of whose rights and liabilities consist only of those of one of the embedded derivatives.

3

Each relevant contract to which a company is treated as a party under subsection (2) is treated for the purposes of this Part as an option, a future or a contract for differences depending on what the character of a separate contract containing the rights and liabilities of the embedded derivative would be.

4

See also section 616 (disapplication of fair value accounting for certain embedded derivatives).