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Under IAS 39 and FRS 26 (for accounting periods beginning before 1 January 2015) it is possible for an embedded derivative to be bifurcated (separated) from any contract (including from a derivative contract). Where such separation takes place, the 'host' contract is not a loan relationship and the embedded derivative does not fall within the provisions of the Disregard Regulations¹ reg 9 (D1.861), any profits or losses arising on the embedded derivative will normally be disregarded in computing the company's profits for the purposes of the derivative contracts legislation. Instead, the profits and losses arising on the contract for tax purposes are determined on the assumption that the contract had not been bifurcated in the company's accounts and that the contract had not been accounted for on a fair value basis². The same treatment applies where the host contract is itself a derivative contract³.

However, a company may elect that the profits and losses arising on the embedded derivative, as recognised in its accounts, should be included in computing its derivative contract profits. Such an election