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FRS102, the new UK GAAP standard, applicable mostly to non-listed entities since 1 January 2015, makes a number of major changes to the rules of accounting for derivatives. As a general principle, Sections 11 and 12 require derivatives to be recognised and measured at their fair value on the balance sheet and changes recorded in the income statement (P&L).
This new accounting regime can create significant P&L volatility, impacting reported EBITDA, and distributable reserves which can potentially affect dividend policies. It can also affect the interpretation and reporting of financial covenants, as well as tax. In order to mitigate that P&L volatility, hedge accounting can be applied in some circumstances if entities meet certain requirements.
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