Forward foreign currency contracts, interest rate swaps and similar contracts are derivatives. They are not basic financial instruments, so they are carried at fair value. This note discloses those fair values and describes what the contracts are for.
What this note shows
A table with up to three rows, each for this year and last, followed by a description:
- Derivative financial assets at fair value – contracts with a positive fair value at the year end.
- Derivative financial liabilities at fair value – contracts with a negative fair value, shown in brackets.
- Fair value gains/(losses) recognised in profit or loss in the year.
A row only prints when it has a figure in either year. Beneath the table the note states that derivatives are measured at fair value and that the amounts are included in debtors and creditors. The note is part of FRS 102 Section 1A accounts; micro-entities cannot use fair value and do not have this note.
Where the figures come from
All three figures are typed in. Take the fair values from the valuation supplied by the bank or broker at the year end. The balance sheet does not have separate lines for derivatives: the asset stays within debtors and the liability within creditors, wherever the trial balance has them, and this note discloses them separately.
Completing the note in Tax Optimiser
Open the period, choose Accounts, then Notes in the left Actions menu. Select Derivative financial instruments in the list. It has two sections.
- In the figures section, set Show this note in the accounts to Yes and enter the fair values for both years. Enter a liability as a positive figure, and a fair value loss as a negative figure.
- In Derivatives and hedging arrangements, set the note to Yes, click Use Template and choose the wording that fits, or type your own.
- Click Save changes to save the note and rebuild the accounts preview.
Add the matching accounting policies as well: Derivative financial instruments and Hedge accounting, and switch the Financial instruments policy to the “Basic and other financial instruments” wording.
Wording templates
- Forward foreign currency contracts – why the company uses forward contracts, the contracts outstanding at the year end and how they are valued. You are asked for {{BuyOrSell}}, {{CurrencyAmount}} and {{MaturityPeriod}}; the year-end date is filled in for you.
- Interest rate swap – the notional amount, fixed rate and maturity of a swap that fixes the interest on bank borrowings. You are asked for {{NotionalAmount}}, {{FixedRate}} and {{MaturityDate}}.
What the note does not cover
- There are no separate balance sheet lines for derivatives.
- Cash flow hedge accounting is not supported: the accounts do not present a cash flow hedging reserve or take the effective part of a hedge through other comprehensive income. A company that applies cash flow hedge accounting needs accounts prepared outside Tax Optimiser.
Frequently asked questions
Is a forward currency contract a derivative?
Yes. A forward contract to buy or sell foreign currency is a derivative and is measured at fair value at the year end, even if it has not yet matured.
Where do I get the fair value?
From the bank or broker that provided the contract. They can give a mark-to-market valuation at the year-end date.
Why is the derivative not a separate line on the balance sheet?
Small company accounts follow the statutory balance sheet format, where a derivative asset sits within debtors and a derivative liability within creditors. The note gives the separate figures.
Can I use hedge accounting?
You can describe a fair value hedge using the Hedge accounting policy. Cash flow hedge accounting is not supported, because it needs a hedging reserve that the accounts do not present.